BRIEF EXERCISES
BE. 12-127
Remington Corporation purchases a patent from Durler Company on January 1, 2017, for $84,000. The patent has a remaining legal of 16 years. Remington feels the patent will be useful for 10 years. Assume that at January 1, 2019, the carrying amount of the patent on Remington's books is $67,200. In January, Remington spends $20,000 successfully defending a patent suit. Remington still feels the patent will be useful until the end of 2026. Prepare Remington's journal entries to record the amortization for 2017 and 2019.
BE. 12-128
Snyder Industries had one patent recorded on its books as of January 1, 2018. This patent had a carrying amount of $252,000 and a remaining useful life of 7 years. During 2018, Snyder brought a patent infringement suit against a competitor. On October 1, 2018, Snyder received the good news that its patent was valid and that its competitor could not use the process Snyder had patented. The company incurred $90,000 to defend the patent. Compute the carrying amount of the patent that would be reported on the December 31, 2018, balance sheet, assuming monthly amortization of carrying value of the patents.
BE. 12-129
On September 1, 2018, Vernon Corporation acquired Barlow Enterprises for a cash payment of $820,000. At the time of purchases, Barlow's balance sheet showed assets of $610,000, liabilities of $240,000, and owner's equity of $420,000. The fair value of Barlow's assets is estimated to be $970,000. Compute the amount of goodwill acquired by Vernon.
BE. 12-130
Merlin Corporation owns a patent that has a carrying amount of $600,000. Merlin expects future net cash flows from this patent to total $375,000. The fair value of the patent is $465,000. Prepare journal entry, if necessary, to record the loss on impairment.
BE. 12-131
Weaver Corporation purchased Merando Company 3 years ago and at that time recorded goodwill of $720,000. The Division's net assets, including the goodwill, have a carrying amount of $1,200,000. The fair value of the division is estimated to be $1,100,000 and implied goodwill is $630,000. Prepare Weaver's journal entry, if necessary, to record impairment of the goodwill.
EXERCISES
Ex. 12-132
Intangible assets have two main characteristics: (1) they lack physical existence, and (2) they are not financial instruments.
Instructions
(a) Explain why intangible assets are classified as assets if they have no physical existence.
(b) Explain why intangible assets are not considered financial instruments.
Ex. 12-133
Intangible assets may be internally generated or purchased from another party. In either case, what costs should be included in the initial valuation of the asset is an issue.
Instructions
(a) Identify the typical costs included in the cash purchase of an intangible asset.
(b) Discuss how to determine the cost of an intangible asset acquired in a non-cash transaction.
(c) Describe how to determine the cost of several intangible assets acquired in a “basket purchase.” Provide a numerical example involving intangibles being acquired for a total price of $90,000.
Ex. 12-134
Why does the accounting profession make a distinction between internally created intangible assets and purchased intangible assets?
Ex. 12-135
1. What are intangible assets?
2. How are limited-life intangibles accounted for subsequent to acquisition?
Ex. 12-136
Redstone Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented. How should these costs be accounted for in the year they are incurred?
Ex. 12-137
Intangible assets have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?
Ex. 12-138
What factors are considered in estimating the useful life of an intangible asset?
Ex. 12-139
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. 12-140
Barkley Corp. obtained a trade name in January 2016, incurring legal costs of $72,000. The company amortizes the trade name over 8 years. Barkley successfully defended its trade name in January 2017, incurring $19,600 in legal fees. At the beginning of 2018, based on new marketing research, Barkley determines that the fair value of the trade name is $60,000. Estimated future net cash flows from the trade name are $64,000 on January 4, 2018.
Instructions
Prepare the necessary journal entries for the years ending December 31, 2016, 2017, and 2018. Show all computations.
Ex. 12-141
Listed below is a selection of accounts found in the general ledger of Marshall Corporation as of December 31, 2018:
Accounts receivable Research & development costs
Goodwill Internet domain name
Organization costs Initial operating loss
Prepaid insurance Non-competition agreement
Radio broadcasting rights Customer list
Premium on bonds payable Video copyrights
Trade name Notes receivable
Instructions
List those accounts that should be classified as intangible assets.
Ex. 12-142
Define the following terms.
(a) Goodwill (b) Bargain purchase
Ex. 12-143
Sisco Co. purchased a patent from Thornton Co. for $930,000 on July 1, 2015. Expenditures of $178,500 for successful litigation in defense of the patent were paid on July 1, 2018. Sisco estimates that the useful life of the patent will be 20 years from the date of acquisition.
Instructions
Prepare a computation of the carrying amount of the patent at December 31, 2018.
Ex. 12-144
In early January 2016, Lerner Corporation applied for a patent, incurring legal costs of $100,000. In January 2017, Lerner incurred $18,000 of legal fees in a successful defense of its patent.
Instructions
(a) Compute 2016 amortization, 12/31/16 carrying amount, 2017 amortization, and 12/31/17 carrying amount if the company amortizes the patent over 10 years.
(b) Compute the 2018 amortization and the 12/31/18 carrying amount, assuming that at the beginning of 2018, based on new market research, Lerner determines that the fair value of the patent is $76,000. Estimated future cash flows from the patent are $84,000 on January 3, 2018.
Ex. 12-145
A patent was acquired by Renfro Corporation on January 1, 2014, at a cost of $80,000. The useful life of the patent was estimated to be 10 years. At the beginning of 2017, Renfro spent $14,000 in successfully defending an infringement of the patent. At the beginning of 2018, Renfro purchased a patent for $21,000 that was expected to prolong the life of its original patent for 5 additional years.
Instructions
Calculate the following amounts for Renfro Corporation.
(a) Amortization expense for 2014.
(b) The balance in the Patent account at the beginning of 2017, immediately after the infringement suit.
(c) Amortization expense for 2017.
(d) The balance in the Patent account at the beginning of 2018, after purchase of the additional patent.
(e) Amortization expense for 2018.
Ex. 12-146
Information concerning Rothlisberger Corporation’s intangible assets follows:
1. Rothlisberger incurred $70,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2017. Legal fees associated with registration of the patent totaled $20,000. Rothlisberger estimates that the useful life of the patent will be 10 years; the legal life of the patent is 20 years.
2. On January 1 2017, Rothlisberger signed an agreement to operate as a franchisee of Dairy King, Inc. for an initial franchise fee of $150,000. The agreement provides that the fee is not refundable and no future services are required of the franchisor. Rothlisberger estimates the useful life of the franchise to be 15 years.
3. A trade name was purchase from Stine Company for $80,000 on May 1, 2015. Expenditures for successful litigation in defense of the trade name totaling $18,000 were paid on June 1, 2017. Rothlisberger estimates that the trade name will have an indefinite life.
Instructions
Prepare the intangible asset section of the Rothlisberger’s balance sheet at December 31, 2017.
Ex. 12-147
The following information is available for Gorman Company.
1. Purchased a copyright on January 1, 2017 for $60,000. It is estimated to have a 10-year life.
2. On July 1, 2017, legal fees for successful defense of the copyright purchased on January 1, 2017, were $17,100.
Instructions
(a) Prepare the journal entries to record all the events related to the copyright during 2017.
(b) At December 31, 2018, an impairment test is performed on the copyright purchased in 2017.
It is estimated that the net cash flows to be received from the copyright will be $60,000, and its fair value is $57,000. The accumulated amortization at the end of 2018 was $14,700. Compute the amount of impairment, if any, to be recorded on December 31, 2018.
Ex. 12-148
On July 1, 2017, Vinson Corporation acquired Carley Company for $900,000 cash. At the time of purchase, Carley’s balance sheet showed assets of $775,000 and liabilities of $250,000. The fair value of Carley’s assets is estimated to be $950,000.
Instructions
(a) Compute the amount of goodwill acquired by Vinson.
(b) On December 31, the fair value of Carley is estimated to be $720,000 and the implied fair value of goodwill is $170,000. The carrying value of Carley’s net assets, including the goodwill, at year-end is $750,000. Prepare Vinson’s journal entry, if necessary, to record impairment of goodwill.
Ex. 12-149
The following information relates to a patent owned by Gentry Company:
Cost $3,400,000
Carrying amount 1,700,000
Expected future net cash flow 1,500,000
Fair value 1,200,000
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016.
(b) Using the same assumption as part (a) above, prepare the journal entry to record amortization expense for 2017 assuming the asset has a remaining useful life of 3 years at the beginning of 2017.
(c) Using the same assumption as part (a) above, prepare the journal entry (if any) at December 31, 2017, assuming the fair value of the asset has increased to $1,900,000.
(d) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2016, assuming Gentry ceased using the patent at the end of 2016 and intends to dispose of the patent in the coming year. Gentry expects to incur a $10,000 cost of disposal.
Ex. 12-150
Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in accordance with generally accepted accounting principles?
Ex. 12-151
Fred’s Company is considering the write-off of a limited life intangible asset because of its lack of profitability. Explain to the management of Fred’s how to determine whether a writeoff is permitted.
Ex. 12-152
Leon Corp. purchased Spinks Co. 4 years ago and at that time recorded goodwill of $640,000. The Spinks Division’s net assets, including goodwill, have a carrying amount of $1,530,000. The fair value of the division is estimated to be $1,600,000.
Instructions
(a) Explain whether or not Leon Corp. must prepare an entry to record impairment of the goodwill. Include the entry, if necessary.
(b) Repeat instruction (a) assuming that the fair value of the division is estimated to be $1,425,000 and the implied goodwill is $480,000.
Ex. 12-153 also delete on page 57&58
Presented below is information related to copyrights owned by Wamser Corporation at December 31, 2017.
Cost $6,000,000
Carrying amount 5,200,000
Expected future net cash flows 4,700,000
Fair value 3,200,000
Assume Wamser will continue to use this asset in the future. As of December 31, 2017, the copyrights have a remaining useful life of 5 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
(b) Prepare the journal entry to record amortization expense for 2018.
(c) The fair value of the copyright at December 31, 2018 is $2,500,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
Ex. 12-154
Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and (c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?
Ex. 12-155
Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct and why?
PROBLEMS
Pr. 12-156—Intangible assets.
The following transactions involving intangible assets of Minton Corporation occurred on or near December 31, 2017. Complete the chart below by writing the journal entry (ies) needed at that date to record the transaction and at December 31, 2018 to record any resultant amortization. If no entry is required at a particular date, write "none needed."
On Date On
of Transaction December 31, 2018
1. Minton paid Grand Company $400,000 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 Minton is in business.
2. Minton spent $600,000 developing a new manufacturing process. It has applied for a patent, and it believes that its application will be successful.
3. In January, 2018, Minton's application for a patent (#2 above) was granted. Legal and registration costs incurred were $210,000. The patent runs for 20 years. The manufacturing process will be useful to Minton for 10 years.
4. Minton incurred $160,000 in successfully defending one of its patents in an infringement suit. The patent expires during December, 2021.
5. Minton incurred $480,000 in an unsuccessful patent defense. As a result of the adverse verdict, the patent, with a remaining unamortized cost of $252,000, is deemed worthless.
6. Minton paid Sneed Laboratories $104,000 for research and development work performed by Sneed under contract for Minton. The benefits are expected to last six years.
Pr. 12-157—Goodwill, impairment.
On May 31, 2018, Armstrong Company paid $3,500,000 to acquire all of the common stock of Hall Corporation, which became a division of Armstrong. Hall reported the following balance sheet at the time of the acquisition:
Current assets $ 900,000 Current liabilities $ 600,000
Noncurrent assets 2,700,000 Long-term liabilities 500,000
Stockholders’ equity 2,500,000
Total liabilities and
Total assets $3,600,000 stockholders’ equity $3,600,000
It was determined at the date of the purchase that the fair value of the identifiable net assets of Hall was $3,100,000. At December 31, 2018, Hall reports the following balance sheet information:
Current assets $ 800,000
Noncurrent assets (including goodwill recognized in purchase) 2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $2,000,000
It is determined that the fair value of the Hall division is $2,200,000. The recorded amount for Hall’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value of $200,000 above the carrying value.
Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2018.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2018.
(c) Assume that the fair value of the Hall division is $1,950,000 instead of $2,200,000. Prepare the journal entry to record the impairment loss, if any, on December 31, 2018.
IFRS QUESTIONS
True/False Questions
1. As in GAAP, under IFRS the costs associated with research and development are segregated into two components.
2. Costs in the research phase are expensed under GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and GAAP.
4. IFRS differs from GAAP in the development phase in that costs are capitalized once technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated intangible assets to be capitalized under GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under GAAP, impairment losses cannot be reversed for assets to be held and used.
9. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under GAAP, impairment loss is measured as the excess of the carrying amount over the assets discounted cash flow.
Multiple-Choice Questions
11. As in GAAP, under IFRS the costs associated with research and development are segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.
12. In accounting for internally generated intangible assets, GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.
13. The following costs are incurred during the research and development phases of a laser bone scanner
Laboratory research aimed at discovery of new knowledge $800,000
Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full production stage (technological feasibility reached) 700,000
Identify which of these are research phase items and will be immediately expensed under
GAAP and IFRS.
GAAP IFRS¬¬¬
a. $1,200,000 $1,200,000
b. $2,400,000 $1,400,000
c. $4,400,000 $4,400,000
d. $4,400,000 $3,700,000
14. The following costs are incurred during the research and development phases of a laser bone scanner
Laboratory research aimed at discovery of new knowledge $800,000
Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full
production stage (technological feasibility reached) 700,000
Identify which of these are development phase items and will be immediately expensed under
GAAP and IFRS.
GAAP IFRS
a. $1,200,000 $1,200,000
b. $2,400,000 $1,400,000
c. $2,400,000 $2,500,000
d. $3,200,000 $2,500,000
15. The primary IFRS related to intangible assets and impairments is found in
a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS 1 and IAS 34.
d. IAS 38 and IAS 36.
16. IFRS allows reversal of impairment losses when
a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company's operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.
17. Under GAAP, impairment losses
a. can be reversed but only if the reversal is greater than the amount of the original impairment.
b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company's operations.
c. cannot be reversed for assets to be held and used.
d. none of these answer choices are correct.
18. IFRS and GAAP
a. are diametrically opposed in their accounting for impairments of assets held for disposal.
b. are similar in the accounting for impairments of assets held for disposal.
c. are moving toward common ground in their accounting for impairments of assets held for disposal.
d. are moving further apart in their accounting for impairments of assets held for disposal.
19. Under IFRS, costs in the development phase are
a. never capitalized, but expensed as they are under GAAP.
b. capitalized if they exceed development phase costs incurred for previously successful ventures.
c. capitalized once technological feasibility is achieved.
d. capitalized on an interim basis, but then expensed prior to the end of the company's fiscal year.
