Intermediate Accounting Vol 1, 3rd Edition – Test Bank

Intermediate Accounting, Vol 1, 3e (Lo/Fisher)

Chapter 9   Intangible Assets, Goodwill, Mineral Resources, and Government Grants

 

Learning Objective 1

 

1) Which of the following is not a characteristic of intangible assets?

1. A) Intangibles do not have physical substance.
2. B) Intangibles benefit more than one year.
3. C) Intangibles have fixed determinable cash flows.
4. D) Intangibles are held for use in the ordinary course of business.

Answer:  C

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

2) Explain how goodwill arises in a business. Give an example in your response.

Answer:  Accounting goodwill represents the difference between the purchase cost of a business and the fair value of its net identifiable assets.

Fair values on the date of acquisition will differ than the carrying amount in the financial statements such as:

– accounts receivable may have a lower fair value due to uncollectible accounts

– additionally accounts receivable do not reflect the time value of money in the financial statements.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

3) Assume that a company has spent $1 million during the year and is deciding whether these costs should be expensed as research costs or capitalized as development costs. Explain the impact of undercapitalization of development costs on the financial statements.

Answer:  The criteria to permit capitalization of development costs is understandably strict. This strictness is aimed at preventing overcapitalization of assets on the balance sheet.

Undercapitalization, however, is important to consider too. Undercapitalization of such assets is quite possible since the company only needs to demonstrate that any one of the development criteria for capitalization are not satisfied.

This would lead to the understatement of assets on the balance sheet and earnings on the income statement.

Starting to capitalize costs that had previously been expensed could create the appearance of improved company performance.

Diff: 2     Type: ES

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

4) Which of the following is a difference between intangible assets and property, plant and equipment (PPE)?

1. A) Intangibles lack physical substance.
2. B) PPE benefit more than one year.
3. C) Intangibles are held for use in the ordinary course of business.
4. D) Intangible assets are generally identifiable.

Answer:  A

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

5) Which of the following is not a difference between intangible assets and property, plant and equipment (PPE)?

1. A) Intangibles do not have physical substance.
2. B) PPE and intangibles benefit for more than one year.
3. C) Intangibles are not held for use in the ordinary course of business.
4. D) PPE are held for use in the ordinary course of business.

Answer:  B

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

6) Which of the following is a difference between intangible assets and property, plant, and equipment (PPE)?

1. A) Held for use in the ordinary course of business.
2. B) Benefit more than one year.
3. C) Physical substance.
4. D) Lack of identifiability.

Answer:  C

Diff: 2     Type: MC

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

7) Which of the following is not a characteristic of an intangible asset?

1. A) It has no physical substance.
2. B) Its useful life may exceed its legal life.
3. C) It may be amortized using the straight-line method.
4. D) It may be impaired and written off.

Answer:  B

Diff: 3     Type: MC

Skill:  Conceptual

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

8) SuperIdeas Corp, a publicly accountable entity, incurred the following costs in its research and development division:

 

	Jan 1 – July 31, 2018	Aug 1- Dec. 31, 2018
Materials	10,000	12,000
Labour costs	15,000	32,000
Directly attributable overhead	8,000	15,000

 

At August 1, 2018, SuperIdeas determined that the project was technically feasible but not commercially viable. How much, if any, of the costs can be capitalized for fiscal 2018?

1. A) $0
2. B) $44,000
3. C) $59,000
4. D) $92,000

Answer:  A

Explanation:  A) Capitalization criteria for development costs are not fulfilled.

Diff: 2     Type: MC

Skill:  Computational

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

9) Research Corp., a publicly accountable entity, incurred the following costs in its research and development division:

 

	Jan 1 – July 31, 2018	Aug 1- Dec. 31, 2018
Materials	10,000	12,000
Labour costs	15,000	32,000
Directly attributable overhead	8,000	15,000

 

At July 31, 2018, Research Corp. determined that the project was technically feasible and commercially viable. Research Corp. had sufficient resources and intentions to complete the project and was confident that there was demand in the marketplace for the product. How much, if any, of the costs can be capitalized for fiscal 2018?

1. A) $0
2. B) $44,000
3. C) $59,000
4. D) $92,000

Answer:  C

Explanation:  C) (12 + 32 + 15)

Diff: 2     Type: MC

Skill:  Computational

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.

 

10) New Ventures Corp., a publicly accountable entity, incurred the following costs in its research and development division:

 

	Jan 1 – April 30, 2018	May 1- Dec. 31, 2018
Materials	10,000	12,000
Labour costs	15,000	32,000
Directly attributable overhead	8,000	15,000
Indirect overhead	5,000	7,000

 

At April 30, 2018, New Ventures determined that the project was technically feasible and commercially viable. New Ventures had sufficient resources and intentions to complete the project and was confident that there was demand in the marketplace for the product. How much, if any, of the costs can be capitalized for fiscal 2018?

1. A) $0
2. B) $59,000
3. C) $66,000
4. D) $92,000

Answer:  B

Explanation:  B) (12 + 32 + 15). Indirect overhead may not be capitalized.

Diff: 2     Type: MC

Skill:  Computational

Objective:  9.1 Evaluate whether a cost qualifies for capitalization as an intangible asset or goodwill.