FAR: Intangible Assets: 3/30/2018 Flashcards
West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year?
1) $4,000
2) $4,500
3) $5,000
4) $5,500
$4,000
Unless there is evidence otherwise, amortization is on a straight-line basis. This intangible has a 10-year life and has a residual value. The annual amortization is 4,000 per year (50,000 – 10,000 = 40,000 / 10 years).
On January 2, 2005, Ames Corp. signed an eight-year lease for office space. Ames has the option to renew the lease for an additional four-year period on or before January 2, 2012. During January 2005, Ames incurred the following costs:
$120,000 for general improvements to the leased premises with an estimated useful life of 10 years.
$50,000 for office furniture and equipment with an estimated useful life of 10 years.
At December 31, 2005, Ames’ intentions as to the exercise of the renewal option are uncertain. A full year’s amortization of leasehold improvements is taken for calendar year two. In Ames’ December 31, 2005 Balance Sheet, accumulated amortization should be:
1) $10,000
2) $15,000
3) $17,000
4) $21,250
$15,000
Leasehold improvements should be amortized over eight years, the remaining term of the lease, because renewal is uncertain. $120,000/8 = $15,000 is the correct answer. The depreciation on the office furniture and equipment is not included in amortization of leasehold.
On January 2, 20X4, Beal, Inc. acquired a $70,000 whole-life insurance policy on its president. The annual premium is $2,000. The company is the owner and beneficiary.
Beal charged officer’s life insurance expense as follows:
20X4 $2,000 20X5 1,800 20X6 1,500 20X7 1,100 Total $6,400 =====
In Beal’s December 31, 20X7 Balance Sheet, the investment in cash surrender value should be:
1) $0
2) $1,600
3) $6,400
4) $8,000
$1,600
The difference between this amount ($6,400) and the $8,000 paid over the four years is the ending cash surrender value ($1,600).
On January 1, 20X4, Bay Co. acquired a land lease for a 21-year period with no option to renew.
The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, 20X5, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building’s estimated market value will be $420,000.
What is the building’s carrying amount in Bay’s December 31, 20X5 Balance Sheet?
1) $798,000
2) $800,000
3) $819,000
4) $820,000
$798,000
This answer ($820,000) incorrectly deducts the salvage value before computing amortization. It also uses 21 years for the amortization period.
The building is a leasehold improvement because it reverts to the lessor at the end of the lease. The residual value belongs to the lessor and is not relevant to the lessee. The building was completed at the beginning of the second year of the lease.
Therefore, the total cost to the lessee of $840,000 is amortized over 20 years, not 21.
In 20X4, Gar Corp. collected $300,000 as beneficiary of a keyman life insurance policy carried on the life of Gar’s controller, who had died in 20X4. The life insurance proceeds are not subject to income tax. At the date of the controller’s death, the policy’s cash surrender value was $90,000.
What amount should Gar report as revenue in its 20X4 Income Statement?
1) $0
2) $90,000
3) $210,000
4) $300,000
$210,000
Most of the $300,000 is recognized as revenue in 20X4. Only the surrender value of $90,000 was recognized in earnings in prior years. Thus, $210,000 is the recognized revenue in 20X4.
Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. The policy’s cash-surrender value had been recorded on Jung’s books at the time of payment.
What amount of revenue should Jung report in its statements?
1) Proceeds received.
2) Proceeds received less cash surrender value.
3) Proceeds received plus cash surrender value.
4) None.
Proceeds received less cash surrender value.
In many cases, most of the proceeds are considered revenue. The cash surrender value (CSV) is an asset that has been recorded previously and is considered redeemed when the firm decides to cash the policy in, or upon death of the insured. A portion of the proceeds equaling the CSV is considered a cashing in for that amount. The remainder is revenue. The cash surrender value never grows to the total amount of proceeds. Thus, the answer could not be $0.
