Section 2F - Intangible

Question 1

On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1?

$20,000

$13,500

$5,000

$16,000

Answer 1

$13,500

The annual expenses would be the $15,000 maintenance contract multiplied by 10/12 of the year covered, or $15,000 × 10/12 = $12,500 from March to the end of the year. Also, expenses would cover 1/5 ($1,000) of the $5,000 from the other costs for one of the five years: $12,500 + $1,000 = $13,500 total.

Question 2

Guidance for recognizing expenses and losses is as follows (SFAC 5.85):

a. _____ Expenses are generally recognized when an enterprise’s economic benefits are consumed in revenue-earning activities or otherwise.
b. ____Expenses or losses are recognized if it becomes evident that previously recognized future economic benefits of assets have been reduced or eliminated, or that liabilities have been incurred or increased, without associated economic benefits.

Answer 2

Consumption of benefit:

Loss or lack of benefit:

Question 3

Expenses are accrued (expensed) based on the matching principle. t/f

Intangible assets subject to amortization may need to be tested for ___

Answer 3

true

impairment.

Question 4

Which of the following statements about the impairment of intangible assets is correct?

When considering impairment for intangible assets, only indefinite life intangible assets are tested for recoverability.

When considering impairment for intangible assets, only finite life intangible assets are tested for recoverability.

When considering impairment for intangible assets, neither finite life nor indefinite intangible assets are tested for recoverability.

When considering impairment for intangible assets, both finite life and indefinite intangible assets are tested for recoverability.

Answer 4

When considering impairment for intangible assets, only finite life intangible assets are tested for recoverability.

The impairment testing process for finite life intangible assets is similar to the process used for tangible fixed assets. First, such assets are tested for impairment, and then if the carrying value is not considered to be recoverable, the amount of the impairment loss is determined as the difference between the fair value and the carrying value of the asset. The recoverability concept is not used when considering the impairment of indefinite life intangible assets.

Question 5

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

0 years

38 years

30 years

Answer 5

25 years

ASB ASC 350-30-20 defines the useful life of an intangible as the period over which the asset is expected to contribute to future cash flows. The copyright cost should be amortized over the shorter of legal or useful life

Question 6

An intangible asset with a finite useful life should be amortized over its useful life to the reporting entity. T/F

There is no arbitrary maximum amortization period. T/F

The useful life should be evaluated ____to determine whether it should be revised. If the useful life is changed, the remaining carrying value is amortized prospectively over the revised remaining useful life.

The amount of an intangible asset to be amortized is the amount initially assigned to that asset less any __ value

Answer 6

True

True

annually

residual value.

Question 7

On January 2, 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 50 years. Its unamortized cost on Krug’s accounting records was $380,000. In Judd’s December 31 balance sheet, what amount should be reported as accumulated amortization?

$7,600

$9,500

$12,500

$10,000

Answer 7

$10,000

If one purchases a trademark, one carries that intangible at purchase cost. If the trademark has a finite life, one amortizes the purchase cost over the useful life.

The annual amortization cost of the trademark is thus the $500,000 cost divided equally by the 50 years, or $10,000 each year. After the first year, the accumulated amortization will only be 1 × $10,000, or $10,000.

Question 8

The following are examples of intangible assets that meet the criteria for recognition apart from goodwill because they meet the contractual-legal criterion:

b. ____domain names
c. N____agreements
d. R___agreements
e. F____agreements
g. Computer ___
h. Trade ___

Answer 8

Internet

noncompetition

royalty

franchise

software

Secrets

Question 9

Brighton Co. spent $500,000 developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $80,000 and this was paid at the beginning of 20X5. The patent has a useful life of 8 years. During 20X8, Brighton spent $75,000 defending the patent in a court of law. Early in 20X9, Brighton was notified they had prevailed in their defense. Because of the results of the lawsuit, the useful life of the patent was extended by 1 year. What amount of patent amortization should Brighton record for 20X9?

$8,000

$23,000

$27,750

$10,000

Answer 9

$23,000

Question 10

The following are examples of intangible assets that do not arise from contractual or other legal rights, but nonetheless should be recognized as assets apart from goodwill because they meet the separability criterion:

a. Customer ___
b. ___technology
c. Data__

Answer 10

lists

unpatented

base

Question 11

On January 2, 20X1, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of $200,000 having an expected benefit period of 10 years. During the first quarter of 20X1, Paye spent an additional $80,000 on expenditures designed to maintain goodwill. Due to these expenditures, on December 31, 20X1, Paye estimated that the benefit period of goodwill was 40 years. For 20X1, Paye assessed impairment to be $7,000. In its December 31, 20X1, balance sheet what amount should Paye report as goodwill?

$273,000

$195,000

$193,000

$180,000

Answer 11

$193,000

FASB ASC 350-20-25-3 provides that any costs of developing, maintaining, or restoring goodwill should be deducted from income when incurred. Obviously, the $80,000 expenditure falls into this category.

The $200,000 of purchased goodwill should be assessed for impairment each year.
Initial cost of goodwill $200,000
Less: 20X1 impairment 7,000
Unamortized amount on December 31, 20X1 $193,000

Question 12

Which of the following is a pair of values that are compared to determine the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?

Fair value, present value

Fair value, carrying value

Future value, carrying value

Carrying value, book value

Answer 12

Fair value, carrying value

The useful life of the asset should be evaluated annually to determine whether it should be revised. If the asset should be determined to no longer have an indefinite life, it should be amortized from that point on a prospective basis. An impairment loss must be recognized for the amount that the carrying value exceeds the fair value.

Question 13

Nutmeg Corporation has a reporting unit that has goodwill with a carrying amount of $175,000 at December 31, 20X2. The carrying value of the reporting unit’s net assets (including goodwill) on December 31, 20X2, is $1,065,000. At that same date, the fair value of the assets and liabilities (excluding goodwill) of the reporting unit is $785,000. The fair value of the reporting unit as a whole is $920,000 at December 31, 20X2. The goodwill impairment loss reportable is:

$175,000.

$145,000.

$40,000.

$135,000.

Answer 13

$40,000.

Question 14

Tech Co. bought a trademark on January 2, two years ago. Tech accounted for the trademark as instructed under the provisions of FASB 142 during the current year. The carrying value at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark. What amount should Tech report as amortization expense for the current year?

$1,000

$0

$38,000

$922

Answer 14

$0

Indefinite life intangibles are not amortized. They must be tested for impairment each year to determine if their value has been impaired. If fair value of an indefinite life intangible is less than book value, the asset is impaired. When this occurs, an impairment loss is recognized and the asset is written down to its fair value. Amortization expense is never reported on indefinite life intangibles, however.

Question 15

Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?

Litigation costs would be expensed regardless of the outcome of the litigation.

Litigation costs would be capitalized only if the patent was purchased rather than internally developed.

Litigation costs would be capitalized regardless of the outcome of the litigation.

Litigation costs would be capitalized if the patent right is successfully defended.

Answer 15

Litigation costs would be capitalized if the patent right is successfully defended..

When a patent is purchased, it is accounted for at its cost. When a patent is internally generated, its cost is generally its legal filing fees. Legal expenses to successfully defend a patent’s rights are considered an added cost to acquire and maintain the rights the patent represents. The successful legal defense costs of the patent help ensure that the patent will continue to be useful throughout its legal (useful) life. These costs benefit future periods (the remaining legal life of the patent) and should be capitalized, added to the patent’s cost, and amortized over its remaining life.

If legal costs are expended in an unsuccessful patent defense, these should be expensed since they do not benefit future periods.

Question 16

At the acquisition date, July 2, 20X1, reporting unit R has a fair value of $370,000 and a carrying amount (including goodwill of $100,000) of $470,000. On December 31, 20X1, the fair value of the assets and liabilities assigned to reporting unit R is $330,000, and the fair value of R is $400,000. The goodwill impairment loss reportable is:

$40,000.

$100,000.

$0.

$30,000.

Answer 16

$30,000.

Question 17

When a patent is purchased, it is accounted for at its _____

. When a patent is internally generated, its cost is generally its ____ filing fees.

Legal expenses to successfully defend a patent’s rights are considered an added cost to acquire and maintain the rights the patent represents. The successful legal defense costs of the patent help ensure that the patent will continue to be useful throughout its legal (useful) life. These costs benefit future periods (the remaining legal life of the patent) and should be ___, added to the patent’s cost, and amortized over its remaining life.

If legal costs are expended in an unsuccessful patent defense, these should be ___since they do not benefit future periods.

Answer 17

cost

legal

capitalized

expensed

Question 18

In Year 3, a company incurred $500,000 of legal costs defending several patents. Included in that amount was $400,000 of legal costs associated with successful outcomes and $100,000 of legal costs associated with unsuccessful outcomes. What amount of legal costs, if any, should the company expense for Year 3?

$400,000

$0

$500,000

$100,000

Answer 18

$100,000

Any legal costs in a successful defense of a patent right are capitalized into the patent account. Any unsuccessful legal costs in a patent defense are expensed as legal expenses. Thus, only the $100,000 would be expensed.

Question 19

If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?

If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment.

If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment.

Impairment testing may be conducted concurrently for the other asset group and goodwill.

The other asset group should be tested for an impairment loss before goodwill is tested.

Answer 19

The other asset group should be tested for an impairment loss before goodwill is tested.

• Goodwill must be tested for impairment at least annually. However, it must be tested between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
• Additionally, if the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. If any other assets are to be tested for impairment (e.g., long-lived assets tested under FASB ASC 360-10-35) at the same time as goodwill is to be tested, those assets must be tested for impairment before goodwill is tested.

Question 20

On December 31, 20X1, Byte Co. had capitalized software costs of $600,000 with an economic life of four years. Sales for 20X2 were 10% of expected total sales of the software. At December 31, 20X2, the software had a net realizable value of $480,000. In its December 31, 20X2, balance sheet, what amount should Byte report as net capitalized cost of computer software?

$480,000

$540,000

$432,000

$450,000

Answer 20

$450,000

When software costs are capitalized, yearly amortization of these costs is based on the greater of the ratio of current sales to expected total sales or the straight-line method over the useful life of the asset (four years).

• Sales ratio: 10% (0.10) × $600,000 = $60,000
• Straight-line: 25% (0.25) × $600,000 = $150,000

Since straight-line amortization is larger and is used, the remaining capitalized cost is $600,000 less $150,000, or $450,000. Since the net realizable value, $480,000, is greater than the $450,000, there is no need for an additional write-off.

Question 21

On January 2, 20X1, Lava, Inc., purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 20X4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during 20X4, assuming that amortization is recorded at the end of each year?

$54,000

$63,000

$72,000

$9,000

Answer 21

$63,000

The remaining unamortized cost of any asset that is totally impaired is a loss.

Cost of patent $90,000

Patent amortization for 20X1 through 20X3
(($90,000 / 10 years) x 3 years) 27,000

Carrying value of patent on 01/01/X4
(amount written off in 20X4) $63,000

Remember: Since amortization is recorded at the end of each year, no amortization for 20X4 has been recorded before 12/31/X4. The objective at the end of 20X4 is to write off all remaining investment since the product was withdrawn from sale.

Question 22

Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. What amount should Alta capitalize related to the patent?

$40,000

$50,000

$490,000

$90,000

Answer 22

$90,000

The cost of a patent on a company’s books is the cost to file for the patent, and it is increased by any legal costs to successfully defend the patent, thus the $40,000 and the $50,000 for a total of $90,000. Development costs are expensed as incurred.

Question 23

If the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an ___ or ___basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists.

If any other assets are to be tested for impairment (e.g., long-lived assets tested under FASB ASC 360-10-35) at the same time as goodwill is to be tested, those assets must be tested for impairment ___goodwill is tested.

Answer 23

annual or interim

before

Question 24

costs of developing, maintaining, or restoring intangible assets generally should be ____as incurred.

a. Most costs incurred internally to develop “intangible assets”
b. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses;

Answer 24

yeah

Question 25

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

Leasehold improvements

Derivative securities

Cost of patent registrations

Cost of research and development

Answer 25

Cost of patent registrations

Intangible assets are assets other than financial assets that lack physical substance. Their value stems from the rights their ownership confers. Some of the most common types of intangible assets are patents, copyrights, trademarks or trade names, franchises, licenses, and goodwill.

Intangible assets do not include financial assets such as bank deposits, accounts receivable, and long-term investments in bonds and stocks (including derivatives). Even though financial assets also lack physical substance, they are not classified as intangible assets. Research and development costs are typically expensed.

Question 26

On January 2, Rafa Co. purchased a franchise with a useful life of 10 years for $50,000. An additional franchise fee of 3% of franchise operation revenues must be paid each year to the franchisor. Revenues from franchise operations amounted to $400,000 during the year. In its December 31 balance sheet, what amount should Rafa report as an intangible asset-franchise?

$50,000

$33,000

$43,800

$45,000

Answer 26

$45,000

A franchise is an intangible asset and, if it has a finite useful life, it is amortized over that useful life. Here the carrying amount of the franchise is $50,000, and amortizing that cost equally over its useful life of 10 years would make for an amortization expense of $5,000 each year. After one year, the franchise will be carried at $45,000 ($50,000 – $5,000).

Question 27

Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due, under the agree­ment, on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the current year ended December 31 is as follows:

01/01 Prepaid royalties $ 65,000
10/31 Royalty payment (charged to royalty expense) 110,000
12/31 Year-end credit adjustment to royalty expense 25,000

In its December 31 balance sheet, Ott should report prepaid royalties of:

$85,000.

$40,000.

$90,000.

$25,000.

Answer 27

$90,000.

Here one needs to convert from the cash method to the accrual method as to the deferred amount of royalty expenses. The royalty payment was charged to (added to) royalty expense, but there was also a year-end credit adjustment downwards to royalty expense. The only reasonable debit to the year-end credit to royalty expense would be to debit (add to) prepaid royalties, as this could only be deferred (not properly accrued this year) royalty expenses.

So far, prepaid royalties have had a debit balance of $65,000, and if one adds an additional debit to prepaid royalties of $25,000, there will be an ending balance of prepaid royalties of $90,000.

Question 28

Darrow Limited operates under a franchise agreement that has limited useful life. On Darrow’s balance sheet, the intangible asset “Franchise” has a book value of $123,500. Because of declining economic conditions, Darrow determines that the undiscounted cash flows from the franchise are $107,000. Darrow recently received an offer of $95,000 to sell the franchise for its remaining useful life. Darrow should:

recognize an impairment loss of $8,000.

recognize an impairment loss of $16,500.

recognize an impairment loss of $28,500.

not recognize an impairment loss.

Answer 28

recognize an impairment loss of $28,500.

Because the franchise is a limited-life intangible asset, the two-step impairment process should be used. The recoverability test (comparison of book value to undiscounted cash flows) indicates that the book value will not be recoverable (undiscounted cash flows of $107,000 is less than the book value of $123,500) and therefore the second step needs to be carried out.

Because the fair value ($95,000) of the franchise is less than the book value ($123,500), the difference between the two values ($123,500 – $95,000 = $28,500) is the amount of the impairment loss.

Question 29

Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?

A trademark with indefinite useful life

Goodwill

A patent

R&D costs for a patent

Answer 29

A patent

The FASB requires that non-goodwill intangible assets with finite lives be amortized, whereas similar assets with indefinite lives are not amortized. Both classifications of non-goodwill intangibles are required to be reviewed for impairment. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets that have indefinite lives are not amortized and therefore are not tested for recoverability. However, they are reviewed for impairment at least annually.

Patents fall into the first group, and are tested for recoverability. Goodwill and the trademark have infinite lives and fall into the second group; they are reviewed at least annually for impairment. Research and development (R&D) costs are expensed, not capitalized.

Question 30

On June 30, Union, Inc., purchased goodwill of $125,000 when it acquired the net assets of Apex Corp. During the year, Union incurred additional costs of developing goodwill, by training Apex employees ($50,000) and hiring additional Apex employees ($25,000). Union’s December 31 balance sheet should report goodwill of:

$150,000.

$175,000.

$125,000.

$200,000.

Answer 30

$125,000.

In a company purchase transaction, goodwill can be recognized. It is maintained at its purchase value, unless and until it is found to be impaired. Costs to maintain or develop goodwill are not capitalized, but are expensed.

Question 31

Goodwill should be tested for value impairment at which of the following levels?

Each identifiable long-term asset

Each reporting unit

Each acquisition unit

Entire business as a whole

Answer 31

Each reporting unit

Goodwill is to be tested for impairment at the level of the reporting unit or at one level below an operating segment.

Question 32

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?

$4,500

$5,000

$4,000

$5,500

Answer 32

$4,000

The amount of an intangible asset to be amortized is the amount initially assigned to that asset less any residual value. The residual value is the estimated fair value of the intangible asset at the end of its useful life to the reporting entity less any disposal costs. The residual value should be assumed to be zero unless at the end of its useful life the asset is expected to continue to have a useful life to another entity and the reporting entity has a commitment from a third party to purchase the asset at the end of its useful life.

In this case, the amount to be amortized is $40,000 ($50,000 – $10,000) over 10 years, or $4,000 a year.

Question 33

Goodwill is to be tested for impairment at the level of the ___unit or at one level below an __ segment

Answer 33

reporting

operating

Question 34

For a public business entity, the goodwill impairment test is required to be performed:

any time during the last quarter of the fiscal year.

only at the beginning of the fiscal year.

any time during the fiscal year, provided that it is performed at the same time every year.

only at the end of the fiscal year.

Answer 34

any time during the fiscal year, provided that it is performed at the same time every year.

Goodwill must be tested for impairment at least annually. However, it must be tested between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, if the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists.

The goodwill impairment test does not have to be performed at the end of the fiscal year. It may be performed any time during the year as long as that date is used consistently from year to year. In addition, all reporting units do not have to use the same testing date.

Question 35

Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of 5 years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?

$40,000

$0

$15,000

$120,000

Answer 35

$0

The trademark is considered to have an indefinite useful life and should not be amortized until its useful life is determined to be no longer indefinite. Any intangible asset with no clear legal or economic limits on its use can thereby be considered to have an indefinite (unlimited) useful life. It is not amortized, but is instead tested annually for possible impairment (as is goodwill).

Question 36

An impairment loss for assets to be held and used is reported as:

element of income from operations.

cumulative effect of change in accounting principle.

other comprehensive income.

discontinued operations.

Answer 36

element of income from operations.

An impairment loss is presented as part of income from operations, and is not presented as discontinued operations or cumulative effect of a change in accounting principle.

Question 37

Johan Co. has an intangible asset, which it estimates will have a useful life of 10 years, while Abco Co. has goodwill, which has an indefinite life. Which company should report amortization in its financial statements?

Both Johan and Abco

Abco only

Johan only

Neither Johan nor Abco

Answer 37

Johan only

An intangible asset with a finite useful life should be amortized over its useful life to the reporting entity. Johan’s intangible should be amortized.

An intangible asset that has an indefinite life should not be amortized, but should be evaluated to determine if it is impaired. Abco’s goodwill has an indefinite useful life and should not be amortized, only evaluated for impairment.

Question 38

An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group:

Carrying value $100,000,000
Sum of the undiscounted cash flows 95,000,000
Fair value 80,000,000

What amount of impairment loss, if any, should be recognized?

$5,000,000

$15,000,000

$20,000,000

$0

Answer 38

$20,000,000

When a long-lived asset is deemed to be impaired, the asset should be written down to a new carrying amount and the impairment loss recognized in the income statement in the period of the impairment. If the sum of the undiscounted cash flows ($95,000,000) is less than the carrying amount ($100,000,000), the entity may have to recognize an impairment loss. The impairment loss, if any, is any excess of the asset’s carrying amount ($100,000,000) over its fair value ($80,000,000), or $20,000,000.

If the sum of the undiscounted cash flows is not less than the carrying amount, no impairment loss is recognized even if the fair value is less than the carrying amount of the asset. The sum of the undiscounted cash flows must be less than the carrying amount for an impairment loss to be recognized.

Question 39

On January 2, 20X1, Gant Co. purchased a franchise with a useful life of five years for $60,000 and an annual fee of 1% of franchise revenues. Franchise revenues were $20,000 during 20X1. Gant projects future revenues of $40,000 in 20X2 and $60,000 per year for the following three years. Gant uses the straight-line method of amortization. What amount should Gant report as intangible asset-franchise, net of related amortization in its December 31, 20X1, balance sheet?

$56,000

$48,160

$48,000

$49,920

Answer 39

$48,000

The cost of the intangible asset-franchise is $60,000. It is not affected by the continuing franchise fees incurred during the life of the franchise, which are expensed as incurred. Straight-line amortization would be $12,000 per year ($60,000 ÷ 5 years). Therefore, at the end of the first year, the carrying value of the asset is $48,000 ($60,000 - $12,000).

Question 40

Gray Co. was granted a patent on January 2, 20X1, and appropriately capitalized $45,000 of related costs. Gray was amortizing the patent over its estimated useful life of 15 years. No impairment losses were recognized. During 20X4, Gray paid $15,000 in legal costs in successfully defending an attempted infringement of the patent. After the legal action was completed, Gray sold the patent to the plaintiff for $75,000. Gray’s policy is to take no amortization in the year of disposal. In its 20X4 income statement, what amount should Gray report as gain from sale of patent?

$24,000

$39,000

$27,000

$15,000

Answer 40

$24,000

Question 41

A company reported $6 million of goodwill in last year’s statement of financial position. How should the company account for the reported goodwill in the current year?

Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement.

Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement

Determine the current year’s amortizable amount and report the current year’s amortization expense.

Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement.

Answer 41

Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement.

Goodwill is impaired when the carrying amount exceeds the goodwill’s implied fair value. If the implied value of the goodwill has decreased below the carrying value, write the goodwill down and recognize a loss.