Intangible Assets PDF intermediate accounting PDF

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An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and invent...

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THEORY OF ACCOUNTS ToA.1611 – Intangible Assets

OCAMPO/CABARLES MAY 2014 REVIEW QUESTIONS

1. PAS 38 applies to a. Intangible assets that are not within the scope of another Standard. b. Financial assets, as defined in PAS 32 Financial Instruments: Presentation. c. The recognition and measurement of exploration and evaluation assets. d. Expenditure on the development and extraction of minerals, oil, natural gas and similar nonregenerative resources. 2. Which is not within the definition of an intangible asset? a. Identifiable nonmonetary asset without physical substance b. A resource controlled by an entity as a result of past event c. A resource from which future economic benefits are expected to flow to the entity d. Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. 3. Which item listed below does not qualify as an intangible asset? a. Computer software b. Registered patent c. Copyrights that are protected d. Notebook computer 4. Which of the following items qualify as an intangible asset under PAS 38? a. Advertising and promotion on the launch of a huge product b. College tuition fees paid to employees who decide to enroll in an executive M.B.A. program at Harvard University while working with the company c. Operating losses during the initial stages of the project d. Legal costs paid to intellectual property lawyers to register a patent 5. The cost of an intangible asset is composed of a. Purchase price excluding import duties and nonrefundable taxes b. Purchase price including import duties and nonrefundable taxes c. Purchase including both refundable and nonrefundable taxes d. Purchase price including trade discounts and rebates 6. Which is incorrect concerning the recognition and measurement of an intangible asset? a. If an intangible asset is acquired separately, the cost comprises its purchase price, including import duties and taxes and any directly attributable expenditure of preparing the asset for its intended use. b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is based on its fair value at the date of acquisition. c. If an intangible asset is acquired free of charge or by way of government grant, the cost is equal to its fair value.

d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the total payments over the credit period. 7. The cost of internally generated intangible asset includes the following, except a. Cost of materials and services used or consumed in generating the intangible asset b. Expenditure on training staff to operate the asset c. Cost to register a legal right d. Salaries, wages and other employment related costs of personnel directly engaged in generating the asset 8. Legal fees incurred by a company in defending its patent rights should be expensed when the outcome of the litigation is Successful Unsuccessful a. Yes Yes b. Yes No c. No No d. No Yes 9. When an internally generated asset meets the recognition criteria, the appropriate treatment for costs previously expensed is: a. Reinstatement. b. No adjustment as these amounts may not be reinstated. c. Include in the cost of the development of the asset. d. Capitalize into the cost of the asset and adjust the opening balance of retained earnings. 10. According to the definition provided in PAS 38 Intangibles, activities undertaken in the ‘research’ phase of the generation of an asset may include: a. The application of knowledge to a design for the production of new materials; b. The use of research findings to create a substantially improved product; c. Using knowledge to materially improve a manufacturing device. d. Original and planned investigation with the prospect of gaining new scientific knowledge; 11. Which statement is correct regarding initial recognition of research and development costs? a. All research costs should be charged to expense. b. All development costs should be capitalized. c. If an enterprise cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the enterprise treats the expenditure for that project as if it were incurred in the development phase only. d. A research and development project acquired in a business combination is not recognized as an asset.

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ToA.1611

EXCEL PROFESSIONAL SERVICES, INC. 12. According to PAS 38 Intangibles, in order to be able to capitalize ‘development’ outlays an entity must be able to demonstrate the following: I. Technical feasibility and intention of completing the asset so it will be available for use or sale. II. Its ability to reliably measure the expenditure on the development of the asset. III. Ability to use or sell the asset. IV. How the asset will generate probable future economic benefits. a. I, II and IV only IV only b. II, and IV only and IV

c.

II, III and

d.

I, II, III

13. PAS 38 Intangibles, prohibits the recognition of the following internally generated identifiable intangibles: I. Brands II. Mastheads III. Publishing titles IV. Customer lists a. I, II and IV only IV only b. II, and IV only and IV

c.

II, III and

d.

I, II, III

14. Which of the following would be considered research and development? a. Routine efforts to refine an existing product. b. Periodic alterations to existing production lines. c. Marketing research to promote a new product. d. Construction of prototypes. 15. Which of the following costs would be capitalized? a. Acquisition cost of equipment to be used on current research project only. b. Engineering costs incurred to advance the product to the full production stage. c. Cost of research to determine whether a market for the product exists. d. Salaries of research staff. 16. 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 a. Research and development expense in the period(s) of construction.

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b. Depreciation deducted as part of research and development costs. 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. 17. Operating losses incurred during the start-up years of a new business should be a. Accounted for and reported like the operating losses of any other business. b. Written off directly against retained earnings. c. Capitalized as a deferred charge and amortized over five years. d. Capitalized as an intangible asset and amortized over a period not to exceed 20 years. 18. Start-up costs include organizational costs, such as legal and state fees incurred to organize a new business entity. These costs should be a. Capitalized and never amortized. b. Capitalized and amortized over 40 years. c. Capitalized and amortized over 5 years. d. Expensed as incurred.

19. Which statement is correct concerning the amortization of an intangible asset? I. The cost less residual value of an intangible asset with a finite useful life should be amortized over that life II. An intangible asset with an indefinite useful life should not be amortized. III. The maximum amortization period cannot exceed twenty years. a. I only b. I and II only c. I and III only d. Neither I, II nor III 20. A consideration not relevant in determining the useful life of the intangible asset is the a. The period of control over the asset and legal or similar limits on the use of the asset b. Technical, technological, commercial or other types of obsolescence c. Expected actions of competitors or potential competitors d. Initial cost 21. The residual value of an intangible asset

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EXCEL PROFESSIONAL SERVICES, INC. a. b.

Is always equal to zero Is equal to zero unless a third party commits to buy the asset at the end of its useful life and there is an active market for the asset c. Is equal to zero unless a third party commits to buy the asset at the end of its useful life or there is an active market for the asset d. May be increased for the purpose of computing amortization amount 22. The method of amortization used for an intangible asset with a finite life a. Should always be the straight-line method b. Need not reflect the pattern of use of the asset c. Should be the straight-line method if the pattern of use cannot be determined reliably d. Should always be the units of production method 23. Which of the following factors should not be considered in determining the useful life of an intangible asset? a. Effects of obsolescence, changes in market demand for the product b. The salvage value of the asset c. Expected actions of competitors and potential competitors d. The period of control over the asset and legal or similar limits on the use of the asset, such as expiry dates of related leases or contractual or regulatory provisions. 24. Goodwill may be recorded when: a. It is identified within a company. b. One company acquires another in a business combination. c. The fair value of a company’s assets exceeds their cost.

d. A company relations.

has

exceptional

customer

25. The reason goodwill is sometimes referred to as a master valuation account is because a. It represents the purchase price of a business that is about to be sold. b. It is the difference between the fair value of the net identifiable assets as compared with the purchase price of the acquired business. c. The value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation. d. It is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value. 26. Which of the following intangible assets should be shown as a separate item on the statement of financial position? a. Goodwill b. Franchise c. Patent d. Trademark 27. Which of the following disclosures is not required by PAS 38? a. Useful lives of the intangible assets b. Reconciliation of carrying amount at the beginning and the end of the year c. Contractual commitments for the acquisition of intangible assets d. Fair value of similar intangible assets used by its competitors

- now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL 1. A newly set up dot-com entity has engaged you as its financial advisor. The entity has recently completed one of its highly publicized research and development projects and seeks your advice on the accuracy of the following statements made by one of its stakeholders. Which one is true? a. Costs incurred during the “research phase” can be capitalized b. Costs incurred during the “development phase” can be capitalized if criteria such as

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technical feasibility of the project being established are met c. Training costs of technicians used in research can be capitalized d. Designing of jigs and tools qualify as research activities 1. 2. When an intangible asset is acquired by an exchange of assets, which of the following measures will need to be considered in the determination of that cost? The: a. Fair value of the asset given up.

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EXCEL PROFESSIONAL SERVICES, INC. b. Carrying amount of the asset received. c. Initial cost of the asset given up. d. Replacement cost of the asset received. 2. 3. A brand name that was acquired separately should initially be recognized, according to PAS38 Intangible assets, at a. Recoverable amount b. Either cost or fair value at the choice of the acquirer c. Fair value d. Cost 3. 4. Once recognized, intangible assets can be carried at a. Cost less accumulated amortization b. Cost less accumulated amortization and less accumulated impairment losses c. Revalued amount less accumulated amortization d. Cost plus a notional increase in fair value since the intangible asset is acquired 4. 5. According to PAS38 Intangible assets, amortization of an intangible asset with a finite useful life should commence when a. It is first recognized as an asset b. it is probable that it will generate future economic benefits c. It is available for use d. The costs can be identified with reasonable certainty 5. 6. In relation to the amortization of intangible assets, if an intangible asset has a finite useful life: 6. a. It must be amortized over a period not exceeding 40 years; 7. b. It must be amortized across a period not exceeding 5 years; 8. c. It is not subject to an annual amortization charge; 9. d. It must be amortized over that life. 10. 7. In relation to amortization of intangible assets, PAS 38 Intangibles, requires that intangible assets with indefinite useful lives: 11. a. Are amortized by the straight-line method across their useful lives; 12. b. Must be amortized across a period of no more than 20 years;

13. c. Are not subject to an amortization charge; 14. d. Should not be amortized in a period in which maintenance of the asset occurs. 15. 8. In relation to the amortisation of intangible assets, the general rule in PAS 38 Intangibles, is that unless demonstrated otherwise: a. The residual value does not enter into the determination of the amortisation charge. b. The residual need no be reviewed at the end of each annual reporting period. c.

All intangible assets have a residual value at least equal to the amount of maintenance costs incurred. The residual value is presumed to be zero.

d. 16. 9. Which statement is incorrect concerning internally generated intangible asset? a. To assess whether an internally generated intangible asset meets the criteria for recognition, an enterprise classifies the generation of the asset into a research phase and a development phase. b. The cost of an internally generated asset comprises all expenditure that can be directly attributed or allocated on a

reasonable and consistent basis to creating, producing and preparing the asset for its intended use. c. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognized as intangible assets. d. Internally generated goodwill may be recognized as an intangible asset. 17. 10. Internally generated goodwill is prohibited from recognition in the financial statements of an entity. The reason for this treatment is that: a. Goodwill is not identifiable; b. Goodwill is not measurable; c. It is not comparable to any other intangible assets; d. It is not prudent to recognize intangible assets. 18. 19.  - end of ToA.1611 -  20.

21.

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CPAR-CHAPTER 12 INTANGIBLE ASSETS TRUE-FALSE—Conceptual Answer F F F F T T T F T T T F T T F F T F T F

No.

Description

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Characteristics of intangible assets. Internally created intangibles. Recording internally generated intangibles. Amortization of limited-life intangible assets. Amortization of intangible assets. Amortizing limited-life intangibles. Accounting for a customer list. Amortization of patents. Modification of an existing patent. Basic concept of goodwill. Internally generated goodwill. Recording internally generated goodwill. Impairment of intangibles. Recognition of impairment loss. Recovery of impairment loss. Impairment of intangibles. Example of research and development costs. Capitalizing research and development costs. Recording research and development costs. Reporting intangible assets.

MULTIPLE CHOICE—Conceptual Answer c b d d b d c d b c a c b a d a b c b

No.

Description

21. 22. 23. 24. S 25. 26. 27. 28. 29. 30. 31. S 32. S 33. 34. 35. 36. 37. S 38. P 39.

Accounting for internally-created intangibles. Amortization methods for intangible assets. Cost of intangible asset. Factors in determining useful life. Classifying intangible assets. Patent amortization. Patent amortization. Legal fees associated with patent infringement. Identification of intangible assets. Amortization of intangible assets. Entry to record patent amortization. Accounting for goodwill. Goodwill as master valuation account. Reporting of "negative goodwill." Accounting for goodwill. Recording goodwill. Impairment of intangible asset. Impairment test for indefinite-life intangibles. Accounting for organization costs.

12 - 2

MULTIPLE CHOICE—Conceptual (cont.) Answer a d d c b a d a c

No. 40. 41. 42. 43. 44. 45. P 46. S 47. P 48.

Description Capitalization of certain R & D costs. Accounting principle for R & D expenditures. Accounting for R & D costs. Costs excluded from R & D expense. Depreciation of laboratory building used in R & D. Operating losses during start-up period. Accounting for organization costs. Classification of R & D expense. Reporting patent amortization.

P

These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. * This topic is dealt with in an Appendix to the chapter. S

MULTIPLE CHOICE—Computational Answer d d c c b b c b b a c b c c d a b b c d b b d c c a a c c

No. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. *76. *77.

Description Valuation of patent. Valuation of patent. Intangible asset amortization. Intangible asset amortization. Computing patent amortization expense. Computing patent amortization expense. Calculate total intangible assets. Determine amount of worthless patent to be written off. Calculate patent amortization. Calculate trademark amortization. Exchange of similar intangible assets. Calculate patent amortization. Calculate goodwill amount. Calculate goodwill amount. Calculate amount of goodwill. Calculate goodwill impairment. Proper accounting when fair value of net assets acquired exceeds cost. Calculate impairment loss. Calculate patent carrying value. Calculate patent carrying value. Calculate loss on impairment of goodwill. Calculate loss on impairment of goodwill. Calculate R & D expense. Calculate R & D expense. Calculate R & D expense. Calculate R & D expense. Calculate R & D expense. Computing computer software costs. Computing computer software costs.

Intangible Assets

12 - 3

MULTIPLE CHOICE—CPA Adapted Answer a c d d c d c a c a

No. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.

Description Determine capitalized patent costs. Valuation of patent exchanged for common stock. Valuation of patent exchanged for treasury stock. Valuation and amortization of a patent. Amortization of a patent. Amortization of a trademark. Capitalization of legal fees. Amortization of goodwill. Calculate R & D expense. Determine R & D expense for the year.

EXERCISES Item E12-88 E12-89 E12-90 E12-91 E12-92 E12-93 E12-94

Description Short essay questions. Intangible assets questions. Intangible assets theory. Carrying value of patent. Accounting for patent. Impairment of copyrights. Acquisition of tangible and intangible assets.

PROBLEMS Item P12-95 P12-96

Description Intangible assets. Goodwill, impairment.

CHAPTER LEARNING OBJECTIVES 1.

Describe the characteristics of intangible assets.

2.

Identify the costs to include in the initial valuation of intangible assets.

3.

Explain the procedure for amortizing intangible assets.

4.

Describe the types of intangible assets.

5.

Explain the conceptual issues related to goodwill.

6.

Describe the accounting procedures for recording goodwill.

7.

Explain the accounting issues related to i...