Exercises and Test Bank of Intermediate Accounting 16E Kieso
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12 Intangible Assets CONCEPTS FOR ANALYSIS 12
CONCEPTS FOR ANALYSIS
CA12-1 (Accounting for Pre-Opening Costs) After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb.
The shopping center would have opened on schedule on January 1, 2017, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2017. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance.
In July 2016, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property.
A summary of some of the costs incurred in 2016 and the first nine months of 2017 follows...
The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2017, the 2016 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2017.
All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on condition that the monthly rental charges for the first 9 months of 2017 be canceled.
Instructions
Explain how each of the costs for 2016 and the first 9 months of 2017 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.
(AICPA adapted)
CA12-2 WRITING (Accounting for Patents) On June 30, 2017, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products.
Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties.
On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry’s management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement.
The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts.
Instructions
(a) What is the meaning of “discounted value of expected net receipts”? Explain.
(b) How would such a value be calculated for net royalty receipts?
(c) What basis of valuation for Ferry’s patents would be generally accepted in accounting? Give supporting reasons for this basis.
(d) Assuming no practical problems of implementation and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain.
(e) What would be the preferable theoretical basis of amortization? Explain.
(f) What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2017? Discuss. (AICPA adapted)
CA12-3 WRITING (Accounting for Research and Development Costs) Cuevas Co. is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2017), the new product has not been manufactured for resale. However, a prototype unit was built and is in operation.
Throughout 2017, the new division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel), and market research costs. In addition, approximately $900,000 in equipment (with an estimated useful life of 10 years) was purchased for use in developing and manufacturing the new product. Approximately $315,000 of this equipment was built specifically for the design development of the new product. The remaining $585,000 of equipment was used to manufacture the pre-production prototype and will be used to manufacture the new product once it is in commercial production.
Instructions
(a) How are “research” and “development” defined in the authoritative literature (GAAP)?
(b) Briefly indicate the practical and conceptual reasons for the conclusion reached by the Financial Accounting Standards
Board on accounting and reporting practices for research and development costs.
(c) In accordance with GAAP, how should the various costs of Cuevas described above be recorded on the financial statements for the year ended December 31, 2017? (AICPA adapted)
CA12-4 ETHICS (Accounting for Research and Development Costs) Czeslaw Corporation’s research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company’s controller, Jeff Reid.
Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company’s own R&D department is first-rate, and he is confident they can do the work well.
Instructions
Answer the following questions.
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues involved?
(c) What should Reid do?