Intangible Assets Test Bank PDF

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FINANCIAL ACCOUNTING AND REPORTING Assessment Examination on Intangible Assets and Research & Development CostsName: ______________________ Section: ____ Score: ____ / 50Instructions: Choose the letter that corresponds to your answer and write them on a ½ crosswise yellow paper. Any form of ...

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FINANCIAL ACCOUNTING AND REPORTING Assessment Examination on Intangible Assets and Research & Development Costs Name: ______________________

Section: ____

Score: ____ / 50

Instructions: Choose the letter that corresponds to your answer and write them on a ½ crosswise yellow paper. Any form of tampering is considered wrong.

1. Which of the following items would qualify as an intangible asset? 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 entity. c. Operating losses during the initial stages of the project. d. Legal costs paid to intellectual property lawyers to register a patent. 2. Which of the following disclosures is not required with respect to intangible assets? 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 competitors. 3.The reason goodwill is referred to as a master valuation account is that 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 estimated value. 4. Which of the following is not one of the criteria which must be met before development costs can be capitalized? a. The entity has sufficient financial resources to complete the project. b. The entity intends to complete the project and either use or sell the intangible asset. c. The entity can reliably identify the research costs incurred to bring the project to economic feasibility. d. The project has achieved technical feasibility. 5. Which of the following accurately describes the appropriate accounting for goodwill acquired through a business combination? a. It should be recorded at cost and amortized over 40-year period b. It should be recorded at cost and amortized over a 10-year period c. It should be recorded at cost and tested for impairment every three years d. It should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur 6. Which of the following is a research and development cost? a. Research and development performed under contract for others b. Development or improvement of techniques and processes c. Offshore oil exploration that is the primary activity of an entity d. Market research related to a major product for the entity 7. Which of the following statements is incorrect regarding internal-use software? a. The application and development costs should be amortized on a straight line basis unless another systematic and rational basis is more appropriate. b. Internal-use software is considered to be software that is marketed as a separate product or as part of a product or process. c. The costs of testing and installing computer hardware should be capitalized as incurred. d. The costs of training and application maintenance should be expensed as incurred. 8. Camille Corporation incurred the following costs in 2017:

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Acquisition of R&D equipment with a useful life of 4 years in R&D projects P 600,000 Start-up costs incurred when opening a new plant 140,000 Advertising expense to introduce a new product 700,000 Engineering costs incurred to advance a product to full production stage 400,000 (economic viability not achieved) What amount should Camille record as research & development expense in 2017? b. 740,000 c. 1,000,000 d. 1,140,000 a. 550,000 9. Kuyab Company incurred P900,000 of research and development cost to develop a product for which a patent was granted on January 2, 2017. Legal fees and other costs associated with the registration of the patent totaled P200,000. On July 31, 2017, Kuyab paid P400,000 for legal fees in a successful defense of the patent. The total amount capitalized for this patent through July 31, 2017 should be: a. 1,500,000 b. 1,100,000 c. 600,000 d. 200,000 10. Laguna Company acquired three patents in January 2017. The patents have different lives as indicated in the following schedule: Cost Remaining useful life Remaining legal life Patent A 2,000,000 10 8 Patent B 3,000,000 5 10 Patent C 6,000,000 Indefinite 15 Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June 2017, the company successfully defended its right to Patent B. Legal fees of P800,000 were incurred in this action. The company’s policy is to amortize intangible assets by the straight-line method to the nearest half year. The company reports on a calendar-year basis. The amount of amortization that should be recognized for 2017 is: a. 1,330,000 b. 1,250,000 c. 2,050,000 d. 950,000 11.Nagcarlan Company purchased a patent on January 1, 2002, for P3,570,000. The patent was being amortized over its remaining legal life of 15 years expiring on January 1, 2017. During 2005 Nagcarlan determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet as patent, net of accumulated amortization, at December 31, 2005? a. 2,618,000 b. 2,520,000 c. 2,448,000 d. 2,142,000 12. On January 2, 2017, San Pedro Company purchased a patent for a new consumer product for P3,000,000. 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, 2020, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should San Pedro charge against income during 2020, assuming amortization is recorded at the end of such year? a. 1,800,000 b. 2,400,000 c. 2,100,000 d. 300,000 13. On January 1, 2017, Mambusao Company bought a trademark from Panitan Company for P6,000,000. Mambusao retained an independent consultant who estimated the trademark’s life to be indefinite. Its carrying amount in Panitan’s accounting records was P4,000,000. In Mambusao’s December 31, 2017 balance sheet, what amount should be reported as trademark? a. 6,000,000 b. 5,700,000 c. 3,800,000 d. 3,600,000 14. On January 1, 2017, Calamba Company signed an agreement to operate as a franchise of Bay Company for an initial franchise fee of P30,000,000. Of this amount, P10,000,000 was paid when the agreement was signed and the balance is payable in equal annual payment of P5,000,000 beginning December 31, 2017. The agreement provides that the down payment

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is not refundable and no future services are required of the franchisor. Calamba’s credit rating indicates that it can borrow money at 12% for a loan of this type. Information on present value factors at 12% for 4 period is: Present value of 1 0.64 Present value of an ordinary annuity of 1 3.04 a. 30,000,000

b. 15,200,000

c. 25,200,000

d. 21,600,000

15. Liliw Company engaged your services to compute the goodwill in the purchase of Calauan Company which provided the following: Net income Net assets 2017 1,400,000 6,000,000 2018 1,600,000 8,000,000 2019 2,000,000 8,800,000 2020 2,200,000 9,200,000 It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on average net assets at 15%. How much is the purchase price for Calauan Company? a. 11,600,000 b. 10,400,000 c. 11,200,000 d. 11,000,000 16. Panay Company is negotiating to acquire Sapian Company. Panay manufactures and sells wood burning stoves and Sapian Company produces parts that are required to manufacture stoves. Sapian enjoys an exceptional reputation and Panay management believes it can continue Sapian’s level of income and satisfy its own need for parts. Under the contemplated arrangement, Panay will negotiate for the acquisition of the net assets of Sapian Company. The recorded amounts and current values of the assets and liabilities of Sapian are: Assets Liabilities Recorded amounts 20,000,000 8,000,000 Current values 25,000,000 5,000,000 Sapian’s earnings for the past 5 years averaged P5,000,000. This is believed to be the a reasonable estimate of future income. The level of income normally experienced by enterprises similar to Sapian is 15%. Panay and Sapian agreed to capitalize average excess earnings at 25% in estimating the value of goodwill. How much should Panay pay in acquiring Sapian? c. 32,000,000 a. 20,000,000 b. 28,000,000 d. 20,500,000 17. The owners of Majayjay Company are planning to sell the business to new interests. The cumulative net earnings for the past 5 years was P9,000,000 including casualty loss of P500,000. The current value of net assets of Majayjay Company was P20,000,000. Goodwill is determined by capitalizing average earnings at 8%. What is the amount of goodwill? a. 1,900,000 b. 1,700,000 c. 3,750,000 d. 1,250,000 18. On January 1, 2017, Carmona purchased Topaz Company at a cost that resulted in recognition of goodwill of P5,000,000 having an expected benefit period of 10 years. During January of 2017, Carmona spent an additional P2,000,000 on expenditures designed to maintain goodwill. Due to these expenditures, at December 31, 2017, Carmona estimated that the benefit period of goodwill was indefinite. In its December 31, 2017 balance sheet, what amount should Carmona report as goodwill? b. 7,000,000 c. 4,750,000 d. 4,500,000 a. 5,000,000 19. Sta. Rosa Company has been experiencing significant losses in prior years. On December 31, 2017, the assets and liabilities are: Cash 10,000,000

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Accounts receivable Inventory Property, plant and equipment Goodwill Liabilities

20,000,000 30,000,000 50,000,000 5,000,000 40,000,000

On December 31, 2017, the fair value of the net assets of Sta. Rosa is P62,000,000. How much is the impairment loss applicable to goodwill? a. 13,000,000 b. 8,000,000 c. 5,000,000 d. 0 20. Luzon Company purchased Jolo Company for P100,000,000. The net assets of Jolo Company on the date of acquisition amounted to P80,000,000. Thus, there is a goodwill of P20,000,000. Jolo Company has three segments, each of which is considered a cash generating unit. The goodwill is allocated respectively to segments One, Two and Three, P5,000,000, P6,000,000 and P9,000,000. On December 31, 2017, Segment One suffered significant losses and its recoverable amount is P30,000,000. On December 31, 2017, the carrying amounts are as follows: Segment One 28,000,000 Segment Two 50,000,000 Segment Three 67,000,000 Goodwill 20,000,000 In its 2017 income statement, Luzon Company should report impairment loss at: 3,000,000 b. 5,000,000 c. 2,000,000 1. d. 1,000,000 21. On January 1, 2017, Paete Company signed a 12-year lease for a building. Paete has an option to renew the lease for an additional 8-year period on or before January 1, 2021. During January 2019, Paete made substantial improvements to the building. The cost of the improvements was P3,600,000, with an estimated useful life of 15 years. At December 31, 2019, Paete intended to exercise the renewal option. Paete has taken a full year’s amortization on this improvement. In the December 31, 2019, balance sheet, the carrying amount of this leasehold improvement should be: a. 3,240,000 b. 3,360,000 c. 3,400,000 d. 3,300,000 22. On January 1, 2018, Puntavedra Company signed an eigth-year lease for office space. Puntavedra has the option to renew the lease for an additional six-year period on or before January 1, 2024. During January 2020, Puntavedra incurred the following costs: General improvements to the leased premises with useful 5,400,000 life of 10 years Office furniture and equipment with useful life of 8 years 2,400,000 Moveable assembly line equipment with useful life of 5 years 1,800,000 At December 31, 2020, Puntavedra’s intention as to the exercise of the renewal option is uncertain. A full depreciation of leasehold improvement is taken for year 2020. In Puntavedra’s December 31, 2020 balance sheet, accumulated depreciation of leasehold improvement should be: a. 1,200,000 b. 1,300,000 c. 540,000 d. 900,000 23. Maayon Company begins construction of a new facility. Following are some of the costs incurred in conjunction with the start-up activities of the new facility: Production equipment 1,500,000 Travel costs of salaried employees 400,000 License fees 50,000 Training of local employees for production and maintenance operations 1,300,000 Advertising costs 100,000

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