FAR 9.01 - INTANGIBLES Flashcards
FAR 9.01 - INTANGIBLES
Which of the following is the proper treatment of the cost of equipment used in research and development
activities that will have alternative future uses?
Expensed in the year in which the research and development project started.
Capitalized and depreciated over its estimated useful life.
Either capitalized or expensed, but not both, depending on the term of the research and development project.
Capitalized and depreciated over the term of the research and development project.
Capitalized and depreciated over its estimated useful life.
EXPLANATION:
When equipment used in research and development activities has alternative future uses, it should be capitalized and depreciated over its estimated useful life, regardless of the term of the research and development project
FAR 9.01 - INTANGIBLES
Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount,
$4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a four-year useful life. Yellow has a policy of taking a full-year’s amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program. What amount should Yellow report as an expense for the current year?
$6,012,500
$1,600,000
$6,050,000
$2,000,000
$6,050,000
EXPLANATION:
When computer software is developed for internal use only, costs incurred in the preliminary project stage as well as costs incurred in training, data conversion and maintenance, should be treated as research and development costs.
Costs incurred after the preliminary project stage and for upgrades and enhancements, should be capitalized and amortized on a straight-line basis.
The correct formula is 4,000,000 + 50,000 + (12,000,000 – 4,000,000 / 4) = $6,050,000.
FAR 9.01 - INTANGIBLES
Which of the following should a company classify as a research and development expense?
Routine design of tools, jigs, molds, and dies
Legal work on patent applications
Redesign of a product prerelease
Periodic design changes to existing products
Redesign of a product prerelease
EXPLANATION:
The term ‘prerelease’ indicates the redesign applies to a product that has not yet been produced.
This redesign is therefore a development cost as defined by the ASC Glossary.
Development costs include construction of prototypes and the conceptual formulation, design, and testing of product alternatives.
Such a cost is classified as a research and development expense.
FAR 9.01 - INTANGIBLES
Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?
$65,000
$25,000
$59,000
$0
$59,000
EXPLANATION:
Franchise agreement revenue is recognized only once the franchisor has performed substantially all the material contractual services and collectability is reasonably assured.
Because Baker performed all services and there appear to be no concerns about collectability, Baker should recognize the full amount of revenue in the current year.
The full amount is the present value of the consideration given and expected, or $59,000 (25,000 + 34,000 = 59,000).
FAR 9.01 - INTANGIBLES
During the current year, Beta Motor Co. incurred the following costs related to a new solar-powered car:
Salaries of laboratory employees researching how to build the new car: $250,000
Legal fees for patent application for new car: $20,000
Engineering follow-up during the early stages of commercial production (the follow-up occurred during the current year): $50,000
Marketing research to promote new car: $30,000
Design/testing/construction of a prototype: $400,000
What amount should Beta Motor report as research and development expense in its income statement for the current year?
$650,000
$750,000
$720,000
$250,000
$650,000
EXPLANATION:
The two costs which must be expensed as research and development expense are the research salaries and the
prototype costs.
Therefore, the R&D expense for the year is $650,000 (250,000 + 400,000 = 650,000).
A patent is a discrete intangible asset, the cost of which may be capitalized.
The other costs are related to the commercial production of the car and are inventoriable.
FAR 9.01 - INTANGIBLES
Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?
$350,000
$0
$50,000
$400,000
$400,000
EXPLANATION:
ASC 730-10-15-4 requires R&D assets acquired in a business combination to be measured and recognized at their fair values at the date of acquisition.
FAR 9.01 - INTANGIBLES
A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes?
25 years.
38 years.
0 years.
30 years.
25 years.
EXPLANATION:
An intangible asset of finite duration must be amortized over the SHORTER OF ITS LEGAL OR USEFUL LIFE.
Because the current analysis has determined that the copyright’s useful life will only be 25 years, it must be amortized over 25 years instead of the 3 years remaining under copyright law.
FAR 9.01 - INTANGIBLES
X Company acquired three machines at the beginning of 20X2, all of which will be used by its engineering
department in performing research and development activities. The three machine consist of:
– Computer equipment costing $320,000 that will be used for general research and development activities.
The computer has a 5-year useful life with no salvage value.
– Storage equipment costing $240,000 to contain a highly volatile substance that is being used in a specific research project. The storage equipment has a useful life of 5 years with no salvage value. The research project is expected to require 3 years to complete after which the equipment will have no alternative use to the company.
– A machine costing $180,000 that will be used for a specific research project that is expected to require one year. At the end of the year, the equipment, which has a 5-year useful life and no salvage value, will be
used in the Company’s manufacturing operations.
How much will X Company report as research and development expense on its 20X2 income statement?
$340,000
$484,000
$740,000
$148,000
$340,000
EXPLANATION:
When an asset is acquired for general research and development activities, it is depreciated over its useful life with the depreciation recognized as research and development (R & D) expense.
As a result, the equipment will be depreciated over its useful life and R & D expense will include $320,000 x 1/5 = $64,000.
When an asset is acquired for a specific R & D project and has no alternative use to the company, the total cost is recognized as R & D expense, increasing X Company’s expense by $240,000.
When an asset is acquired that will be used for R & D, after which it will have an alternative use to the company, it is depreciated and the depreciation is recognized as R & D expense while it is being used for that purpose and as a manufacturing expense when it is converted to that purpose.
The first year’s depreciation on the machine, $180,000 x 1/5 or $36,000 will be recognized as R & D expense resulting in a total of $64,000 + $240,000 + $36,000 = $340,000.
FAR 9.01 - INTANGIBLES
Which of the following types of assets would typically be reported on a company’s balance sheet as an intangible asset?
Cost of patent registrations
Derivative securities
Leasehold improvements
Cost of research and development
Cost of patent registrations
EXPLANATION:
Patents are typically reported on a company’s balance sheet as intangible assets.
Costs of obtaining and successfully defending patents are capitalized.
FAR 9.01 - INTANGIBLES
North Co. entered into a franchise agreement with South Co. for an initial fee of $50,000. North received $10,000 at the agreement’s signing. The remaining balance was to be paid at a rate of $10,000 per year, beginning the following year. North’s services per the agreement were not complete in the current year. Operating activities will commence next year.
What amount should North report as franchise revenue in the current year?
$10,000
$20,000
$50,000
$0
$0
EXPLANATION:
Under franchise agreements, revenue should be recognized when the franchisor has substantially performed all material services and conditions, and collectability from the franchisee is reasonably assured.
Since North Co., the franchisor, has not substantially performed all material services, no revenue can be recognized in the current year.
FAR 9.01 - INTANGIBLES
Stam Co. incurred the following research and development project costs during the current year:
- Equip purchased for current/future projects- $100,000
- Equip purchased for current projects only- $200,000
- R&D salaries for current projects- $400,000
- Legal fees to obtain patent- $50,000
- Material/labor costs for prototype product $600,000
The equipment has a five-year useful life and is depreciated using the straight-line method.
What amount should Stam recognize as research and development expense at year end?
$450,000
$1,350,000
$1,000,000
$1,220,000
$1,220,000
EXPLANATION:
Equipment purchased for current projects only; salaries for current R&D projects; and material and labor costs for prototype projects must all be expensed immediately as R&D expenses, for a total of $1,200,000.
The remaining $20,000 is depreciation on the equipment purchased for current and future projects. Since this equipment has possible future benefits, it
may be capitalized initially with its costs amortized as R&D over its useful life.
Legal fees to obtain a patent are not R&D costs
Thus, the total amount of R&D expense at year-end is $1,220,000.
FAR 9.01 - INTANGIBLES
Tech Co. bought a trademark on January 2, two years ago. Tech accounted for the copyright as instructed under the provisions of FASB ASC Topic 350 – Intangibles – Goodwill and Other. The intangible was being amortized over its useful life of 40 years. The carrying value at the beginning of the year was $38,000. It was determined during the current year that the cash flow from the trademark will be generated indefinitely at the current level.
What amount should Tech report as amortization expense for the current year?
$38,000
$0
$922
$1,000
$0
EXPLANATION:
Upon determining that the trademark will generate cash flows indefinitely, the intangible would be considered and intangible with an indefinite useful life.
These intangibles are not subject to amortization but are required to be evaluated for impairment at least annually.
FAR 9.01 - INTANGIBLES
In 20X1, X Company recognized an impairment loss on the trade name for its beverage product, reducing the
carrying value from $485,000 to $350,000. At December 31, 20X3, while preparing its financial
statements, X Company has determined that the fair value of the trade name has risen and it is now worth $500,000.
What amount will be reported for the trade name on X Company’s December 31, 20X3 balance sheet?
$485,000
$500,000
$350,000
Cannot be determined without information about the trade name’s useful life
$350,000
EXPLANATION:
When an intangible is written down due to an impairment, the reduced amount becomes its new carrying value and is used for future impairment evaluations.
The recognized impairment loss will not be reversed.
The trade name, which has an indefinite useful life and is not amortized, may be written down further but may not be written up.
As a result, the carrying value will be $350,000 at December 31, 20X3.
FAR 9.01 - INTANGIBLES
During the current year ended December 31, Metal, Inc. incurred the following costs:
Laboratory research aimed at discovery of new knowledge - $75,000
Design of tools, jigs, molds, and dies involving new technology - $22,000
Quality control during commercial production, including routine testing- $35,000
Equipment acquired two years ago, having an estimated useful life of five years with no salvage value, used in various R & D projects - $150,000
Research and development services performed by Stone Co. for Metal, Inc.- $23,000
Research and development services performed by Metal, Inc. for Clay Co. - $32,000
What amount of research and development expenses should Metal report in its current-year income statement?
$120,000
$217,000
$187,000
$150,000
$150,000
.
.EXPLANATION:
Research, design of tools, etc. for new technology, and outsourced R&D services performed by another company must all be expensed to R&D immediately ($75,000 + $22,000 + $23,000 = $120,000).
While equipment used solely for current R&D projects would be expensed, equipment for current and future R&D projects should be capitalized and depreciated.
Depreciation expense for the year is 30,000 (150,000 / 5 = 30,000). Quality control during commercial production is not an R&D expense an R&D services performed for another company generate revenues.
Metal should report R&D expenses of $150,000 in its current year income statement ($120,000 + $30,000 depreciation expense = $150,000).
FAR 9.01 - INTANGIBLES
On January 2, 20X5, Judd Co. bought a trademark from Krug Co. for $500,000. Judd retained an independent consultant, who estimated the trademark’s remaining life to be fifty years. Its unamortized cost on Krug’s accounting records was $380,000.
In Judd’s December 31, 20X5 balance sheet, what amount should be reported as accumulated amortization?
$10,000
$9,500
$12,500
$7,600
$10,000
EXPLANATION:
When an intangible has a useful life that can be determined, the intangible is amortized over that period.
As a result, the $500,000 cost will be amortized over 50 years at the rate of $10,000 per year.
December 31, 20X5 is the end of the first year during which Judd owned the patent indicating that accumulated amortization would include only one year’s amount, or $10,000. The carrying value on Krug’s books is not relevant.
