Unit 9 questions

Question 1

Organization costs are those incurred in the formation of a business entity. Under the federal tax code, organization and start-up costs must be capitalized and amortized over a period of not less than 15 years. However, for financial accounting purposes, nongovernmental entities must:

Answer 1

expense all start-up and organization costs as incurred.

Question 2

IAS 38, Intangible Assets, defines an intangible asset as an:

Answer 2

nonmonetary asset without physical substance.

Question 3

Costs of start-up activities, including organization costs, should be ________as incurred.

Answer 3

expensed

Question 4

On June 30, Year 5, Finn, Inc., exchanged 2,000 shares of Edlow Corp. $30 par-value common stock for a patent owned by Bisk Co. The Edlow stock was acquired in Year 1 at a cost of $50,000. At the exchange date, Edlow common stock had a fair value of $40 per share, and the patent had a net carrying amount of $100,000 on Bisk’s books. Finn should record the patent at
A.	$80,000
B.	$100,000
C.	$50,000
D.	$60,000

Answer 4

Answer (A) is correct.
When an intangible asset is acquired in an exchange transaction, initial recognition is at the fair value of the more clearly evident of the consideration given or the asset acquired. The fair value of the assets given in return for the patent was $80,000 (2,000 shares of stock × $40 per share fair value).

Question 5

Organization costs are those incurred in the formation of a business entity. For financial accounting purposes, nongovernmental entities must:s.

Answer 5

expense all start-up and organization costs as incurred. Thus, the legal fees should be expensed because they are organization costs. Fees for an initial stock offering are customarily treated as a reduction in the proceeds rather than as organization costs, and exploration costs and purchases of mineral rights are capitalizable items that are not organization costs.

Question 6

are R&D costs expenses or capitalized?

Answer 6

Expensed as they are incurred

Question 7

If cash is the consideration given in an exchange transaction, the cash paid is the measure of the transaction. If noncash consideration (noncash assets, liabilities incurred, or equity interests issued) is given, the measure is based on the more reliably determinable of the fair value of the consideration given or the fair value of the asset or net assets acquired. Furthermore, the only objective of present value used in initial recognition and fresh-start measurements is to estimate fair value in the absence of a market price. Consequently, only the carrying amount of the previous owner is

Answer 7

not a proper measure of cost.

Question 8

Vair Publishing Company owns a copyright. A material amount of legal fees and other costs it incurred in successfully defending a copyright suit should be

Answer 8

Capitalized as part of the cost of the copyright and amortized over the remaining useful life of the copyright

Question 9

Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if

Answer 9

An active market exists for the intangible asset.
IFRS uses cost or revaluation model
An intangible asset is carried at cost minus any accumulated amortization and impairment losses, or at a revalued amount. The revaluation model is similar to that for items of PPE (initial recognition of an asset at cost). However, fair value must be determined based on an active market.

Question 10

A purchased patent has a remaining legal life of 15 years. If it’s useful life is known, it should be amortized over:

Answer 10

Amortized over its useful life if less than 15 years.
The amortization period for an intangible asset distinct from goodwill is the shorter of its useful life or the legal life remaining after acquisition.

Question 11

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is allowed or not?

Answer 11

It is prohibited.

Question 12

To measure an intangible asset after initial recognition, an entity must choose either the cost model or the revaluation model as its accounting policy. The revaluation model may be chosen only if an intangible asset has:

Answer 12

an active market.

Question 13

What kind of intangible assets are subject to recoverability test when testing for impairment?

Answer 13

Intangible assets include those with finite useful lives

Question 14

The default method of amortization of intangible assets is the:

Answer 14

straight-line method.

Question 15

Hy Corp. bought Patent A for $40,000 and Patent B for $60,000. Hy also paid acquisition costs of $5,000 for Patent A and $7,000 for Patent B. Both patents were challenged in legal actions. Hy paid $20,000 in legal fees for a successful defense of Patent A and $30,000 in legal fees for an unsuccessful defense of Patent B. What amounts should Hy capitalize for patents?
A.	$112,000
B.	$65,000
C.	$45,000
D.	$162,000

Answer 15

$65,000 (40+5+20)
The costs associated with Patent B should be written off immediately because its unsuccessful defense suggests that no asset exists.

Question 16

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for 3 years. The royalties paid should be reported as expense
A. At the date the royalty agreement expired.
B. In the period paid.
C. At the date the royalty agreement began.
D. In the period incurred.

Answer 16

In the period incurred.
Royalty expense is recognized when it is incurred as determined by a contractual arrangement. The basic principles of accrual accounting regarding the matching of revenues and expenses are applicable. Thus, the expense should be recognized as the economic benefits of the assets are consumed.

Question 17

A patent is amortized over the:

Answer 17

shorter of its useful life or legal life

Question 18

A company should recognize goodwill in its balance sheet at which time?

Answer 18

When goodwill has been created in the purchase of a business.

Question 19

Goodwill is tested for impairment at least annually but is never:

Answer 19

amortized.

Question 20

Goodwill arises from a business combination. For the purposes of impairment testing, IFRS provide for goodwill to be allocated to which components of the acquirer’s entity?
A. Reportable segments.
B. Operating segments.
C. Cash-generating units that benefit from the combination.
D. Long-lived tangible assets affected by the combination.

Answer 20

Answer (C) is correct.
For the purpose of impairment testing, goodwill acquired in a business combination must from the acquisition date be allocated to each of the acquirer’s cash-generating units (CGUs) expected to benefit from the combinations. A CGU is the smallest identifiable asset group that generates cash inflows substantially independent of inflows from other assets or asset groups.

Question 21

Potential impairment of goodwill is deemed to exist only if:

Answer 21

carrying amount of a reporting unit is greater than its fair value.

Question 22

Goodwill should be tested for value impairment at which levels?

Answer 22

Each reporting unit.

Question 23

Under both U.S. GAAP and IFRS, internally generated goodwill must be recognized as an asset?

Answer 23

Under both U.S. GAAP and IFRS, internally generated goodwill must not be recognized as an asset. Goodwill can be recognized only in a business combination.

Question 24

An entire acquired entity is sold. The goodwill remaining from the acquisition should be

Answer 24

Included in the carrying amount of the net assets sold.
When a reporting unit is disposed of in its entirety, goodwill of that reporting unit (to the extent an impairment loss has not been recognized) is included in the carrying amount of the reporting unit to determine the gain or loss on disposal. Consequently, the unimpaired goodwill of each reporting unit of the acquired entity is included in the total carrying amount of that entity.

Question 25

If goodwill and another asset group of a reporting unit are tested for impairment simultaneously, what test must be done first?

Answer 25

the other asset group must be tested for impairment before goodwill. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.

Question 26

Franchise fee revenue ordinarily should be recognized at the earliest time when the franchisor has:

Answer 26

substantially performed all material services or satisfied all material conditions relating to the franchise sale.

Question 27

are legal fees to obtain a franchise expensed or capitalized?

Answer 27

Capitalized

Question 28

R&D costs must be expensed as incurred. But this rule does not apply to:

Answer 28

(1) R&D activities conducted for others or

(2) assets acquired in a business combination that are used in R&D activities

Question 29

Costs to develop computer software for internal use in Brill’s general management information system is R&D?

Answer 29

general and administrative costs not clearly related to R&D activities are not included as R&D costs. Thus, costs to develop software for the company’s own general management information system are also not R&D costs.

Question 30

What is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?

Answer 30

Capitalized and depreciated over its estimated useful life.
The costs of equipment acquired or constructed for R&D and having alternative future uses are capitalized as tangible assets and depreciated over its estimated useful life.

Question 31

If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings as

Answer 31

Depreciation deducted as part of research and development costs.

Question 32

out or Preliminary Project Stage, Application Development Stage and Post implementation/Operation Stage: which, if any can be capitalized?

Answer 32

Application Development Stage, other stages are expensed.

Question 33

Costs of producing masters is expensed or capitalized? What stage does it belong to?

Answer 33

It is capitalized- belongs in the “Application Development Stage”

Question 34

Development of a working model of a software is expensed or capitalized? What stage does it belong to?

Answer 34

It is expensed- it belongs in the “Preliminary Project Stage”

Question 35

Customer support and training is expensed or capitalized? What stage does it belong to?

Answer 35

It is expensed- it belongs in the “Post Implementation- operation stage”

Question 36

Any costs before technological feasibility is established is expensed or capitalized?

Answer 36

Expensed.

Question 37

The guidance for software revenue recognition applies to determination of the amounts and timing of revenue recognition that is not incidental to another product or service as a whole. Under this guidance, if a software arrangement requires significant production, modification, or customization, what is the usual method of accounting?
A. Separate accounting for the elements of the arrangement.
B. Separate accounting only for the service element.
C. Long-term construction contract accounting.
D. Residual accounting.

Answer 37

Long-term construction contract accounting.
Answer (C) is correct.
The accounting for long-term construction contracts (percentage-of-completion method or completed-contract method, as appropriate) ordinarily should be used. Thus, separate accounting for different elements is not permitted unless an exception applies.

Question 38

After technological feasibility has been established for a software product, all software production costs incurred until the product is available for general release to customers shall be capitalized and subsequently reported at the lower of:

Answer 38

unamortized cost or net realizable value.