Download Chapter 12 Solutions Intermediate Accounting Kieso Weygandt Warfield and more Exercises Accounting in PDF only on Docsity!
CHAPTER 12
Intangible Assets
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Intangible assets; concepts, definitions; items comprising intangible assets.
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14
1, 2, 3, 5, 6
1, 2, 3, 5, 6
1, 2
- Patents; franchise; organization costs; trade name.
9, 10, 11, 25 1, 2, 3, 4, 7, 9, 10
4, 5, 6, 7, 8, 9, 10, 12
1, 2, 3, 5, 6
1, 2
- Goodwill. 12, 13, 14, 18 5, 7, 8 6, 11, 12, 14
4, 5
- Impairment of intangibles.
15, 16, 17, 18 6, 7, 8 13, 14 5
- Research and development costs and similar costs.
19, 20, 21, 22, 23, 24
11, 12, 13 4, 15, 16, 17
1, 2, 3, 6 1, 3, 4
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Describe the characteristics, valuation, and amortization of intangible assets.
1, 2, 3, 6, 7, 8, 9, 10, 25
1, 2, 3, 4, 9, 10
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12
1, 2, 3, 5 1, 2, 3, 4
- Describe the accounting for various types of intangible assets.
10, 11, 25 1, 2, 3, 4, 9, 10
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 16
1, 2, 3, 5, 6
1, 2, 3
- Explain the accounting issues for recording goodwill.
5, 12, 13, 14, 18, 25
5 11, 12, 14 1, 4, 5
- (^) Explain impairment procedures and presentation requirements for intangible assets.
6, 7, 15, 16, 17, 18
6, 7, 8 7, 10, 13, 14
2, 4, 5, 6
- (^) Describe the accounting and presentation for research and development and similar costs.
9, 10, 19, 20, 21, 22, 23, 24
9, 10, 11, 12, 13
4, 5, 6, 8, 9, 15, 16, 17
1, 2, 4, 6 1, 3, 4
ANSWERS TO QUESTIONS
- The two main characteristics of intangible assets are: (a) they lack physical substance. (b) they are not a financial instrument.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- If intangibles are acquired for stock, the cost of the intangible is the fair value of the consideration given or the fair value of the consideration received, whichever is more clearly evident.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- Limited-life intangibles should be amortized by systematic charges to expense over their useful life. An intangible asset with an indefinite life is not amortized.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- When intangibles are created internally, it is often difficult to determine the validity of any future service potential. To permit deferral of these types of costs would lead to a great deal of subject- tivity because management could argue that almost any expense could be capitalized on the basis that it will increase future benefits. The cost of purchased intangibles, however, is capitalized because its cost can be objectively verified and reflects its fair value at the date of acquisition.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- Companies cannot capitalize self-developed, self-maintained, or self-created goodwill. These expen- ditures would most likely be reported as selling expenses.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- Factors to be considered in determining useful life are: (a) The expected use of the asset by the entity. (b) The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate. (c) Any legal, regulatory, or contractual provisions that may limit useful life. (d) Any legal, regulatory or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost. (e) The effects of obsolescence, demand, competition, and other economic factors. (f) The level of maintenance expenditure required to obtain the expected future cash flows from the asset.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- The amount of amortization expensed for a limited-life intangible asset should reflect the pattern in which the asset is consumed or used up, if that pattern can be reliably determined. If the pattern of production or consumption cannot be determined, the straight-line method of amortization should be used.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
- This trademark is an indefinite life intangible and, therefore, should not be amortized.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication
Questions Chapter 12 (Continued)
- The $190,000 should be expensed as research and development expense in 2017. The $91,000 is expensed as selling and promotion expense in 2017. The $45,000 of costs to legally obtain the patent should be capitalized and amortized over the useful or legal life of the patent, whichever is shorter.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Amortization Expense .................................................................... 35, Patents (or Accumulated Patent Amortization) ......................... 35, Straight-line amortization is used because the pattern of use cannot be reliably determined.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Artistic-related intangible assets involve ownership rights to plays, pictures, photographs, and video and audiovisual material. These ownership rights are protected by copyrights. Contract-related intangible assets represent the value of rights that arise from contractual arrangements. Examples are franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Varying approaches are used to define goodwill. They are (a) Goodwill should be measured initially as the excess of the fair value of the acquisition cost over the fair value of the net assets acquired. This definition is a measurement definition but does not conceptually define goodwill. (b) Goodwill is sometimes defined as one or more unidentified intangible assets and identifiable intangible assets that are not reliably measurable. Examples of elements of goodwill include new channels of distribution, synergies of combining sales forces, and a superior manage- ment team. (c) Goodwill may also be defined as the intrinsic value that a business has acquired beyond the mere value of its net assets whether due to the personality of those conducting it, the nature of its location, its reputation, or any other circumstance incidental to the business and tending to make it permanent. Another definition is the capitalized value of the excess of estimated future profits of a business over the rate of return on capital considered normal in the industry. A bargain purchase (or negative goodwill) occurs when the fair value of the assets purchased is higher than the cost. This situation may develop from a market imperfection. In this case, the seller would have been better off to sell the assets individually than in total. However, situations do occur (e.g., a forced liquidation or distressed sale due to the death of the company founder), in which the purchase price is less than the value of the identifiable net assets.
LO: 3, Bloom: K, Difficulty: Moderate, Time: 5-10, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: Communication
- Goodwill is recorded only when it is acquired by purchase. Goodwill acquired in a business combination is considered to have an indefinite life and therefore should not be amortized, but should be tested for impairment on at least an annual basis.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
Questions Chapter 12 (Continued)
- (a) Personnel (labor) type costs incurred in R&D activities should be expensed as incurred. (b) Materials and equipment costs should be expensed immediately unless the items have alternative future uses. If the items have alternative future uses, the materials should be recorded as inventories and allocated as consumed and the equipment should be capitalized and depreciated as used. (c) Indirect costs of R&D activities should be reasonably allocated to R&D (except for general and administrative costs, which must be clearly related to be included) and expensed.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- (a) Expense as R&D. (b) Expense as R&D. (c) Capitalize as patent and/or license and amortize. Also, see Illustration 12-15 (page 22).
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- Each of these items should be charged to current operations. Advertising costs have some minor exceptions to this general rule. However, the specific accounting is beyond the scope of this textbook.
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- $585,000 ($400,000 + $60,000 + $125,000).
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- These costs are referred to as start-up costs, or more specifically organizational costs in this case. The accounting for start-up costs is straightforward—expense these costs as incurred. The profession recognizes that these costs are incurred with the expectation that future revenues will occur or increased efficiencies will result. However, to determine the amount and timing of future benefits is so difficult that a conservative approach—expensing these costs as incurred—is required.
LO: 4, 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- The total life, per revised facts, is 40 years (10 + 30). There are 30 (40 – 10) remaining years for
amortization purposes. Original amortization:
$540, 30
= $18,000 per year; $18,000 X 10 years expired = $180,000 accumulated amortization. $540,000 original cost –180,000 accumulated amortization $360,000 remaining cost to amortize $360,000 ÷ 30 years = $12,000 amortization for 2017 and years thereafter.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 12-
Carrying Amount
Life in Months
Amortization Per Month
Months Amortization
Patent (1/1/17) $288,000 96 $3,000 12 Legal costs (12/1/17) 85,000 85 $1,000 1 $373,
Carrying amount ....................................................... $373, Less: Amortization of patent (12 X $3,000) ............ (36,000) Legal costs amortization (1 X $1,000) .......... (1,000) Carrying amount 12/31/17 ........................................ $336,
LO: 1, 2, 5, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 12-
Copyright No. 1 for $9,900 should be expensed and therefore not reported on the balance sheet.
Copyright No. 2 for $24,000 should be capitalized. Because the useful life is indefinite, copyright No. 2 should be tested at least annually for impairment using a fair value test. It would be reflected on the December 31, 2017 balance sheet at its cost of $24,000.
LO: 1, 2, 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
BRIEF EXERCISE 12-
Organization Expense .................................................. 60, Cash ..................................................................... 60,
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 12-
Research and Development Expense ...................... 430, Cash .................................................................. 430,
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 12-
(a) Capitalize (b) Expense (c) Expense (d) Expense
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 12-2 (Continued)
Investments in affiliated companies would be classified as part of the investments section of the balance sheet.
Research and development costs would be classified as an operating expense on the income statement.
Discount on notes payable is shown as a deduction from the related notes payable on the balance sheet.
Organization costs are start-up costs and should be expensed as incurred.
LO: 1, 2, Bloom: AN, Difficulty: Simple, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
EXERCISE 12-3 (10–15 minutes)
(a) Trademarks $15, Excess of cost over fair value of net identifiable assets of acquired subsidiary (goodwill) 75, Total intangible assets $90,
(b) Organization costs, $24,000, should be expensed.
Discount on bonds payable, $35,000, should be reported as a contra account to bonds payable in the long-term liabilities section on the balance sheet.
Deposits with advertising agency for ads to promote goodwill of company, $10,000, should be reported either as an expense or as prepaid advertising in the current assets section of the balance sheet. Advertising costs in general are expensed when incurred or when first used.
Cost of equipment acquired for research and development projects, $90,000, should be reported with property, plant, and equipment, on the balance sheet because the equipment has an alternative use.
Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years, $80,000, should be classified as research and development expense on the income statement.
LO: 1, 2, Bloom: AN, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
EXERCISE 12-4 (15–20 minutes)
- Alatorre should report the patent at $600,000 ($1,000,000 cost net of $400,000 accumulated amortization) on the balance sheet. The computation of accumulated amortization is as follows.
Amortization for 2015 and 2016 ($1,000,000/10) X 2 $200, 2017 amortization: ($1,000,000 – $200,000) ÷ (6 – 2) 200, Accumulated amortization, 12/31/17 $400,
- Alatorre should amortize the franchise over its estimated useful life. Because it is uncertain that Alatorre will be able to retain the franchise at the end of 2025, it should be amortized over 10 years. The amount of amortization on the franchise for the year ended December 31, 2017, is $40,000: ($400,000/10).
- These costs should be expensed as incurred. Therefore $275,000 of organization expense is reported in income for 2017.
- Because the license can be easily renewed (at nominal cost), it has an indefinite life. Thus, no amortization will be recorded. The license will be tested for impairment in future periods.
LO: 1, 2, 5, Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
EXERCISE 12-7 (10–15 minutes)
(a) 2016 amortization: $16,000 ÷ 10 = $1,600. 12/31/16 book value: $16,000 – $1,600 = $14,400.
2017 amortization: ($14,400 + $7,800) ÷ 9 = $2,467. 12/31/17 book value: ($14,400 + $7,800 – $2,467) = $19,733.
(b) 2017 amortization: ($14,400 + $7,800) ÷ 4 = $5,550. 12/31/17 book value: $14,400 + $7,800 – $5,550 = $16,650.
(c) Carrying amount ($19,733) > future cash flows ($16,000); thus the trade name fails the recoverability test. The new carrying value is $15,000—the trade name’s fair value.
2018 amortization (after recording impairment loss): $15,000 ÷ 8 = $1,875. 12/31/18 book value: $15,000 – $1,875 = $13,125.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 12-8 (15–20 minutes)
(a) CARTER COMPANY Intangibles Section of Balance Sheet December 31, 2017
Patent from Ford Company, net of accumulated amortization of $560,000 (Schedule 1) $1,440, Franchise from Polo Company, net of accumulated amortization of $48,000 (Schedule 2) 432, Total intangibles $1,872,
Schedule 1 Computation of Patent from Ford Company Cost of patent at date of purchase $2,000, Amortization of patent for 2016 ($2,000,000 ÷ 10 years) (200,000) 1,800, Amortization of patent for 2017 ($1,800,000 ÷ 5 years) (360,000) Patent balance $1,440,
Schedule 2 Computation of Franchise from Polo Company Cost of franchise at date of purchase $ 480, Amortization of franchise for 2017 ($480,000 ÷ 10) (48,000) Franchise balance $ 432,
(b) CARTER COMPANY Income Statement Effect For the year ended December 31, 2017
Patent from Ford Company: Amortization of patent for 2017 ($1,800,000 ÷ 5 years) $360, Franchise from Polo Company: Amortization of franchise for 2017 ($480,000 ÷ 10) $ 48, Payment to Polo Company ($2,500,000 X 5%) 125,000 173, Research and development costs 433, Total charged against income $966,
LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 12-10 (15–20 minutes)
(a) Patent A Life in years 17 Life in months (12 X 17) 204 Amortization per month ($30,600 ÷ 204) $ Number of months amortized to date Year Month 2013 10 2014 12 2015 12 2016 12 46
Carrying amount 12/31/16 $23,700: ($30,600 – [46 X $150])
Patent B Life in years 10 Life in months (12 X 10) 120 Amortization per month ($15,000 ÷ 120) $ Number of months amortized to date Year Month 2014 6 2015 12 2016 12 30
Carrying amount 12/31/16 $11,250: ($15,000 – [$125 X 30])
Patent C Life in years 4 Life in months (12 X 4) 48 Amortization per month ($14,400 ÷ 48) $ Number of months amortized to date Year Month 2015 4 2016 12 16
Carrying amount 12/31/16 $9,600: ($14,400 – [$300 X 16])
EXERCISE 12-10 (Continued)
At December 31, 2016 Patent A $23, Patent B 11, Patent C 9, Total $44,
(b) Analysis of 2017 transactions
- The $245,700 incurred for research and development should be expensed.
- The book value of Patent B is $9,750 ($11,250-$1,500) and its estimated future cash flows are $6,000: (3 X $2,000); therefore Patent B is impaired. The impairment loss is imputed as follows:
Book value $9, Less: Present value of future cash flows ($2,000 X 2.57710) 5, Loss recognized $ 4,
Patent B carrying amount (12/31/17) $5,
At December 31, 2017 Patent A $21,900 ($23,700 – [12 X $150]) Patent B 5,154 (Present value of future cash flows) Patent C 6,000 ($9,600 – [12 X $300]) Patent D 34,560 ($36,480 – $1,920*) Total $67,
Patent D amortization Life in years 9 1/ Life in months 114 Amortization per month ($36,480 ÷ 114) $ $320 X 6 = $1,
LO: 1, 2, 4, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
