Intangibles, R&D, Software, and Other Assets

Question 1

What is peculiar about recording patent costs?

Answer 1

Cost of competing patent acquired to protect existing patent is capitalized

Cost to successfully legally defend patent is capitalized

Question 2

How is a franchise recorded?

Answer 2

Cannot be internally developed

Capitalize all significant costs, including PV of any future cash payments

Periodic service fees are operating expense, not capitalized

Question 3

What is a leasehold?

Answer 3

A right to use rented properties

Prepaid rent is an intangible asset until it is expensed

Question 4

How should leasehold improvements be recorded?

Answer 4

Capitalized and amortized over their estimated useful life or the remaining lease term, whichever is shorter (if the lessee intends to renew the lease, that is included in the lease term)

Question 5

What does a copyright cover?

Answer 5

Forbids others’ reproduction of the owner’s written works, designs, and literary productions

Copyright period lasts 70 years beyond owner’s life, but should be amortized over its useful life

Question 6

How are intangible assets initially recorded?

Answer 6

External acquisition costs are measured at fair value (proportioned to relative fair value in group purchases)

Internally developed costs are expensed as incurred, not capitalized

Question 7

How should intangible assets with finite useful lives be amortized?

Answer 7

As best reflects how the asset will be used up

If this cannot be reliably determined, then straight-line method should be used

Salvage value should be assumed as zero unless there is evidence otherwise

Question 8

How often should the remaining useful life of an intangible asset be evaluated?

Answer 8

Every reporting period

Assets with indefinite useful lives are also evaluated

Question 9

How should intangible assets with indefinite useful lives be accounted for?

Answer 9

Should be tested at least annually for impairment

If determined to have a finite life, asset should be tested for impairment and then amortized

Question 10

How should assets obtained for an R&D project be recorded?

Answer 10

If no alternative use, they should be expensed as incurred, like all other R&D costs

If alternative future uses, they should be recorded as assets and amortized with charges to R&D expense

Question 11

How are contractually reimbursable R&D costs recorded?

Answer 11

Not expensed as R&D

Question 12

To what do “computer software” accounting rules apply?

Answer 12

Either (1) computer software to be sold/leased as a separate product or (2) software to be sold/leased as an essential (non-incidental) part of another product

Question 13

Which internal costs in developing software are expensed as R&D?

Answer 13

All expenses up to the point of technological feasibility

Question 14

How are costs after technological feasibility reported?

Answer 14

Costs of producing product masters (including coding and testing) are capitalized

For software which is part of another product, costs are not capitalized until all R&D for the other components of the product are completed

Question 15

Which other costs may be capitalized for software?

Answer 15

Indirect costs (e.g. overhead for programmers’ facilities) can be, but not general & administrative expenses, which must be expensed for the period in which they’re incurred

Question 16

When does capitalization end for software costs?

Answer 16

When the product is available for general release to customers

Maintenance and customer service are expensed

Question 17

What is the accounting guidance for software that is purchased?

Answer 17

Generally the same – e.g. if the software already has technological feasibility when purchased, then the whole cost is capitalized; if it still needs developing, then it is expensed

Question 18

Which software costs are inventoriable?

Answer 18

Costs for (a) duplicating the software, documentation, and training materials from product masters and (b) physically packaging the product are capitalized as inventory on a unit-specific basis

Question 19

How much of the capitalized software costs are amortized annually?

Answer 19

Greater of (1) the ratio of current gross revenues for the product to total estimated revenues and (2) straight-line method for remaining useful life

Amortization begins when the product is available for release to customers

Question 20

What is the net realizable value test for computer software?

Answer 20

At each balance sheet date, unamortized capitalized costs for software products are compared to their NRV and written off to a lower value if applicable

Question 21

What is the net realizable value for computer software?

Answer 21

Estimated future gross revenues minus estimated future costs of completing and disposing of the product, including maintenance and customer support costs

Question 22

What is the proper accounting guidance for computer software developed or obtained for internal use?

Answer 22

Generally the same as software for sale, except that capitalization ends when the project is “substantially complete and ready for its intended use”

Training and maintenance costs are expensed as incurred

There is no NRV, so capitalized costs are amortized over their useful life without any write-offs

Question 23

What are two different ways to record prepaid expenses as journal entries?

Answer 23

1. Date of payment
   Debit: Prepaid expense
   Credit: Cash

Year-end
Debit: Expense
Credit: Prepaid expense

2. Date of payment
   Debit: Expense
   Credit: Cash

Year-end
Debit: Prepaid expense
Credit: Expense

Question 24

How should prepaid expenses be classified on the balance sheet?

Answer 24

Current asset if it will be paid in 12 months, otherwise noncurrent asset

This is the case even for companies with operating cycles under twelve months

Question 25

How should the cash surrender value for life insurance be classified?

Answer 25

Noncurrent asset – among “Investments and Funds”

Question 26

How do cash values for life insurance affect the reported life insurance expense?

Answer 26

Expense = (premium) - (increase in cash value + dividends received)

Question 27

How does a leasehold improvement salvage value affect its amortization?

Answer 27

It doesn’t. The amortization is not depreciation, so the salvage value is ignored. Amortization is “to zero.”

Question 28

How should costs of developing, maintaining, or restoring goodwill be recorded?

Answer 28

Expensed when incurred, not capitalized

Question 29

If a company tests for goodwill and determines that FV is higher than carrying value, how is it reported?

Answer 29

No increase in goodwill – there are never any gains on goodwill by remeasurement to FV, only losses

Question 30

If assets are acquired solely for R&D, but partially for future R&D projects, how is it recorded?

Answer 30

It is expensed to R&D as it is consumed for R&D

Question 31

When determining amortization for a bond, how does the NRV test fit in?

Answer 31

Intangible assets should be written down at year-end from unamortized cost to NRV – so first amortize the asset and then compare it, to determine whether to write it down