3.5 Intangible Assets

Question 1

Which of the following types of assets would typically be reported on a company’s balance sheet as an intangible asset?

A. Leasehold improvements.
B. Derivative securities
C. Cost of research and development
D. Cost of patent registrations

Answer 1

D. Cost of patent registrations

Internally developed intangibles other than goodwill are most often initially recorded at the amount of the incidental costs only. Thus, cost of patent registration is capitalized as patent cost and reported in the financial statements.

Question 2

Which of the following assets, if any, acquired this year in an exchange transaction is (are) potentially amortizable for public companies?

• Goodwill: yes/no
• Trademarks: yes/no

Answer 2

• Goodwill: no
• Trademarks: yes

Goodwill is tested for impairment at least annually but is never amortized for public companies. Trademarks, however, may be amortized but only if they have finite useful lives.

Question 3

Kale Co. purchased bonds at a discount on the open market as an investment and has the intent and ability to hold these bonds to maturity. Absent an election of the fair value option, Kale should account for these bonds a

A. Cost
B. Fair Value
C. Amortized Cost
D. Lower of cost or market

Answer 3

C. Amortized cost

Without an election of the fair value option, investments in debt securities that the investor has the ability and positive intend to hold until maturity must be classified as held-to-maturity and measured at amortized cost.

Question 4

Legal fees incurred by a company in defending its patent rights should be capitalized when the outcome of litigation is

• Successful: Yes/No
• Unsuccessful: Yes/No

Answer 4

• Successful: Yes
• Unsuccessful: No

Question 5

A recognized intangible asset is amortized over its useful life

A. Unless the pattern of consumption of the economic benefits of the asset is not reliably determinable
B. If that life is determined to be finite
C. Unless the precise length of that life is not known
D. If that life is indefinite but not finite

Answer 5

B. If that life is determined to be finite

A recognized intangible asset is amortized over its useful life if that useful life is finite, that is, unless the useful life is determined to be indefinite. The useful life of an intangible asset is indefinite if no foreseeable limit exists on the period over which it will contribute, directly or indirectly, to the reporting entity’s cash flows.

Question 6

A corporation purchased a patent at the beginning of Year 1 for $22,100 that was to be amortized over 17 years. On July 1 of Year 8, the corporation incurred legal costs of $11,400 to successfully defend the patent. The amount of amortization expense that the corporation should record for Year 8 is

A. $2,500
B. $1,971
C. $1,900
D. $1,300

Answer 6

C. $1,900

The corporation will amortize the cost of patent on a straight-line basis at the rate of $1300 per year. The costs of a successful legal defense of a patent are capitalized and amortized over the shorter of the remaining legal life or the estimated useful life of the patent. Because the legal costs to defend the patent were incurred when the patent had 9.5 years of life remaining, they will be amortized at a rate of $1200 per year. Because Year 8 only includes a half year’s depreciation for the legal costs, total amortization expense for that year is $1900 ($1300 + 900).

Question 7

Which of the following costs associated with an internally developed patent should be capitalized?

Research and development: yes/no
Patent Registration: yes/no

Answer 7

Research and development: no
Patent registration: yest

Generally, R&D costs are expensed as incurred. Legal fees and registration fees are excluded from the definition of R&D, Thus, the patent registration fees should be capitalized as a cost associated with an internally developed patent. The patent’s R&D costs should have been expensed as they were incurred.

Question 8

On July 1, a company acquired a patent on its new manufacturing process, which streamlines its production operation. The costs of of the patent was $17,000 and the company expects that the useful life of the new process will be 10 years, although the legal life of the patent is 17 years. The company is a calendar-year corporation and is preparing its December 31 Statement of Financial Position. At which amount should the patent be reported at December 31 of the year of acquisition?

A. $15,300
B. $16,000
C. $16,150
D. $16,500

Answer 8

C. $16,150

A patent is amortized over the shorter of its useful life or legal life, so annual amortization on this patent is $1700. The depreciation expense for the year of acquisition is $850 (1700 x (6/12months)). The patent should therefore be reported at December 31 at $16150.

Question 9

Which one of the following statements correctly describes the accounting treatment of research and development costs (R&D) under U.S. GAAP and IFRS?

A. Both U.S. GAAP and IFRS allow for costs of R&D to be capitalized.
B. Neither U.S. GAAP nor IFRS allow for costs of R&D to be capitalized.
C. U.S. GAAP allow for the capitalization of the costs of R&D, and IFRS require R&D costs to be expensed
D. U.S. GAAP require R&D to be expensed, and IFRS require research costs to be expensed but allow for the capitalization of the development costs.

Answer 9

D. U.S. GAAP require R&D to be expensed, and IFRS require research costs to be expensed but allow for the capitalization of the development costs.