Intangible Assets and Goodwill Chapter 12 Verified Test Bank - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
CHAPTER 12
INTANGIBLE ASSETS AND GOODWILL
CHAPTER STUDY OBJECTIVES
1. Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics. We have an economy that is increasingly dominated by information and service providers, and their major assets are often intangible in nature. Identifying and measuring intangible assets tends to be difficult, and as a result many intangibles are not captured on companies’ statements of financial position. However, intangible assets and goodwill remain critically important for companies, and are a key focus of standard setters in North America and internationally.
Intangible assets have three characteristics: (1) they are identifiable, (2) they lack physical substance, and (3) they are nonmonetary in nature. Goodwill represents the difference between the fair value of the identifiable assets acquired and liabilities assumed and the consideration given when a company acquires another business.
2. Identify and apply the recognition and measurement requirements for purchased intangible assets. A purchased intangible asset is recognized when it is probable that the entity will receive the expected future economic benefits and when its cost can be measured reliably. It is measured initially at cost. When several intangibles, or a combination of intangibles and other assets, are acquired in a business combination, the cost of each intangible asset is its fair value. When acquired in a business combination, the identifiable intangibles are recognized separately from the goodwill component.
3. Identify and apply the recognition and measurement requirements for internally developed intangible assets. No costs are capitalized unless they meet the general recognition criteria concerning future benefits and measurability. Costs incurred in the research phase of developing an intangible asset internally are expensed. Costs incurred in the development phase of a project are capitalized under IFRS if the entity can demonstrate that it meets six stringent criteria. These criteria are designed to provide evidence that the asset is technically and financially feasible and that the company has the intent and ability to generate future economic benefits from it. Under ASPE, entities have a choice whether to capitalize or expense costs that meet the six criteria.
4. Explain how intangible assets are accounted for after initial recognition. Under ASPE, intangible assets are accounted for using the cost model. IFRS also allows the revaluation model to be used if the asset’s fair value is determined in an active market, but it is not used often. An intangible with a finite or limited useful life is amortized over its useful life to the entity. Except in unusual and specific circumstances, the residual value is assumed to be zero. The amount to report for amortization expense should reflect the pattern in which the asset is consumed or used up if that pattern can be reliably determined. Otherwise, a straight-line approach is used. An intangible with an indefinite life is not amortized until its life is determined to no longer be indefinite. All intangibles are tested for impairment.
5. Identify and explain the accounting for specific types of intangible assets. Major types of intangibles include the following: (1) marketing-related intangibles that are used in the marketing or promotion of products or services, (2) customer-related intangibles that result from interactions with outside parties, (3) artistic-related intangibles that involve ownership rights to such items as plays and literary works, (4) contract-based intangibles that represent the value of rights that arise from contractual arrangements, and (5) technology-related intangible assets that relate to innovations or technological advances.
6. Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets. Under ASPE, impairment is determined and applied by using the cost recovery impairment model. Impairment for limited-life intangible assets is based first on a recoverability test. If the carrying amount is higher than the asset’s (undiscounted) net recoverable amount, then a loss on impairment must be measured and recognized, based on the asset’s fair value. No reversals of such losses are permitted. The procedures are the same as for property, plant, and equipment. Indefinite-life intangibles use only a fair value test. Under IFRS, the rational entity impairment model is used. An intangible asset is impaired only if its carrying amount is higher than its recoverable amount. The recoverable amount is defined as the greater of the asset’s value in use and its fair value less costs to sell. The loss on impairment is the difference between the carrying amount and the recoverable amount, if lower. The loss may be reversed subsequently if economic conditions change and the recoverable amount increases. The same approach is used under IFRS for both limited-life and indefinite-life intangible assets.
7. Explain how goodwill is measured and accounted for after acquisition. Goodwill is unique because, unlike all other assets, it can be identified only with the business as a whole. It is not an identifiable asset. Goodwill is recorded only when a business is purchased. To calculate goodwill in a 100% acquisition, the fair value of the identifiable assets that are acquired and liabilities that are assumed is compared with the fair value of the consideration transferred for the acquired business. The difference is goodwill. After acquisition, it is not amortized but is regularly assessed for impairment.
8. Explain and account for impairment of goodwill. Goodwill is assigned to a cash-generating group or reporting unit and the group/unit is tested for impairment. Under ASPE, a goodwill loss on impairment is recognized if the fair value of the unit is lower than its carrying amount, and the loss is equal to the difference. Under IFRS, there is a goodwill impairment loss if the recoverable amount of the cash-generating unit is less than its carrying amount. The loss is equal to the difference and is applied to goodwill first. Under both ASPE and IFRS, goodwill impairment losses are not reversed.
9. Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets. Disclosures under ASPE are limited because users can typically access additional information. Under IFRS, significant details are required to be disclosed. The disclosures allow a reader to determine how amounts invested in classes of intangibles (and goodwill) have changed over the period, with substantial information provided when fair values are used, such as under the revaluation model and all impairment calculations. For intangibles that are not amortized, companies must indicate the amount of any losses on impairment that have been recognized as well as information about the circumstances that led to the write own. Goodwill must be separately reported, as must the major classes of intangible assets. Because it is difficult to measure intangibles, some resources, such as intellectual capital and other internally developed intangible assets, do not get captured on the statement of financial position. Other intangibles are recognized, but with a relatively high level of measurement uncertainty. For these reasons, care must be taken when analyzing financial statement information related to earnings and total assets.
10. Identify differences in accounting between IFRS and ASPE. There are few, but significant, differences between ASPE and IFRS regarding intangible assets and goodwill. One major difference is the accounting treatment for costs incurred in the development phase of internally generated intangible assets that meet the six stringent criteria for capitalization. Under ASPE, entities can choose whether to capitalize these costs or expense all such costs. Under IFRS, these costs are capitalized. The other major difference is the impairment models applied: the cost recovery model for ASPE, and the rational entity model for IFRS.
11. Explain and apply basic approaches to valuing goodwill. One method of valuing goodwill is the excess-earnings approach. Using this approach, the value of goodwill is based on discounting expected future earnings in excess of the industry average to their present value. Another method involves determining the total value of the business by capitalizing total earnings, and then deducting the fair values of the identifiable net assets. The number of years method of valuing goodwill simply multiplies the excess earnings by the number of years of expected excess earnings. Another method of valuing goodwill is the discounted free cash flow method, which projects the future operating cash that will be generated over and above the amount needed to maintain current operating levels. The present value of the free cash flows is today’s estimate of the firm’s value.
Answer No. Description
b 1. Intangible assets and goodwill
b 2. Definition of goodwill
a 3. Characteristics of intangible assets
b 4. Types of intangible assets
c 5. Measurement of purchased intangible assets
a 6. Recognition of goodwill
c 7. Capitalization of legal fees
a 8. Calculate total intangible assets
b 9. Determine goodwill
b 10. Patent costs
d 11. Recognition of internally developed intangibles
a 12. Amortization of laboratory building used in R & D
a 13. Capitalization of certain R & D costs
d 14. Capitalization of research expense
a 15. Calculate development costs
c 16. Calculate R & D expense
a 17. Calculate capital costs
c 18. Treatment of research costs
c 19. Treatment of research and development costs
c 20. Determining limited-life intangible asset’s useful life
c 21. Amortization of finite life of intangible asset
c 22. Use of revaluation model
d 23. Definition of “indefinite life”
a 24. Amortization method for intangibles
d 25. Accounting for a change in amortization rate
d 26. Calculate trademark amortization
b 27. Calculate amortization of a trademark
a 28. Calculate amortization of a trademark
d 29. Calculate amortization of a patent
b 30. Intangible asset book value
b 31. Post-acquisition accounting for intangibles – ASPE
c 32. Post-acquisition accounting for intangibles – IFRS
a 33. Example of limited-life intangible asset
b 34. Amortization of patent cost
b 35. Accounting for computer software costs
b 37. Legal fees associated with trademark infringement
c 38. Accounting for internally developed trademark
d 39. Example of artistic-related intangible
a 40. Example of technology-related intangible
a 41. Accounting for limited-life franchises or licences
c 42. Calculate patent costs to capitalize
b 43. Valuation of patent exchanged for an investment in shares
Answer No. Description
d 44. Valuation of copyright exchanged for common shares
b 45. Valuation of customer lists
c 46. Amortization on customer lists
b 48. Impairment of intangible asset
a 49. Rational entity impairment model
b 50. Impairment of intangibles under ASPE
d 51. Impairment test for indefinite-life intangibles
b 52. Calculate amount of worthless patent to be written off
c 53. Calculate impairment loss
c 54. Intangible asset impairment
c 55. Asset impairment ASPE
a 56. Rational entity impairment model
d 57. Cost of goodwill
c 58. Example of intangible asset
d 59. Impairment of goodwill under IFRS
a 60. Methods of accounting for goodwill
c 61. Internally generated goodwill
d 62. Accounting for purchased goodwill
b 63. Definition of negative goodwill
d 64. Negative goodwill
b 65. Proper accounting when fair value of net assets acquired exceeds cost
d 66. Capitalization of goodwill costs
b 67. Calculating goodwill
c 68. Calculating goodwill
d 69. Testing goodwill for impairment using APSE
c 70. Goodwill impairment under IFRS
a 71. Goodwill impairment under ASPE
d 72. Reversal of goodwill impairment
b 73. Treatment of goodwill impairment
b 74. Impairment of goodwill
b 75. Impairment of goodwill
a 76. Trends in reporting intangible assets
b 77. Difference between market capitalization and book value
a 78. Intangible assets disclosures
b 79. Statement comparability
c *80. Excess-earnings valuation approach
d *81. Earnings normalization process
d *82. Methods of measuring goodwill
a *83. Calculate goodwill
b *84. Calculate goodwill
c *85. Calculate goodwill
c *86. Calculate implied goodwill
b *87. Calculate goodwill
c *89. Calculate goodwill
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item Description
E12-90 Intangible assets and goodwill
E12-91 Intangible assets theory and terminology
E12-92 Journal entries for patent purchase
E12-93 Carrying value of patent
E12-94 Journal entries for patent sale
E12-95 Intangible asset impairment
E12-96 Capitalization of R&D costs
E12-97 Identifying R&D stage activities
E12-98 Criteria for capitalization of development costs
E12-99 Intangible asset definitions and descriptions
E12-100 Revaluation model limitations with intangible assets
E12-101 Indefinite versus infinite useful life and technology-based assets
E12-102 Intangible asset impairment
E12-103 Alternative treatments of goodwill after recognition
E12-104 Acquisition of tangible and intangible assets
E12-105 Goodwill measurement and recording
E12-106 Goodwill impairment
E12-107 Determining impairment loss under ASPE
E12-108 Reporting a patent purchase
E12-109 Disclosures required for internally generated intangible assets
*E12-110 Calculation of goodwill
*E12-111 Calculation of goodwill
*E12-112 Calculation of goodwill
*E12-113 Goodwill calculation
*E12-114 Calculation of goodwill
PROBLEMS
Item Description
P12-115 Intangible assets
P12-116 Journal entries for impairment of intangible assets
P12-117 Cost recovery impairment model
P12-118 Rational entity impairment model
P12-119 Impairment of indefinite life intangibles
P12-120 Calculation of and journal entries for impairment of goodwill
P12-121 Determining goodwill impairment – ASPE and IFRS
*P12-122 Excess earnings approach to calculating goodwill
*P12-123 Total earnings approach to calculating goodwill
Multiple Choice QUESTIONS
1. Which of the following is NOT generally true of intangible assets and goodwill?
a) Many major public companies have significant amounts of intangible assets and goodwill listed on their balance sheets.
b) The major assets of today’s information and service providers are likely to be tangible.
c) The major assets of today’s information and service providers are likely to be intangible.
d) Since identifying and measuring intangibles and goodwill is often difficult, they are not always reported on the balance sheet.
Difficulty: Easy
Learning Objective: Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics.
Section Reference: The Business Importance and Characteristics of Goodwill and Intangible Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. Which of the following best describes goodwill?
a) internal value generated by way of a brand image
b) the excess of fair value transferred to acquire a business over fair value amounts assigned to identifiable assets
c) internal value generated by way of a company’s charitable activities and philanthropic acts
d) a company’s intentions to impact the community and environment in a favourable way
Difficulty: Easy
Learning Objective: Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics.
Section Reference: The Business Importance and Characteristics of Goodwill and Intangible Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. The three main characteristics of intangible assets are
a) identifiability, non-physical existence, and nonmonetary nature.
b) identifiability, physical existence, and separability.
c) separability, identifiability, and nonmonetary nature.
d) physical existence, nonmonetary nature, and identifiability.
Difficulty: Easy
Learning Objective: Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics.
Section Reference: The Business Importance and Characteristics of Goodwill and Intangible Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. Which of the following is NOT a type of intangible asset?
a) Trademark
b) Financial instrument
c) Patent
d) Copyright
Difficulty: Easy
Learning Objective: Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics.
Section Reference: The Business Importance and Characteristics of Goodwill and Intangible Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
5. Which of the following is INCORRECT about the measurement of purchased intangible assets?
a) Purchased intangible assets are measured at cost, which is their fair value at acquisition.
b) Cost includes the acquisition cost and all expenditures necessary to make the intangible asset ready for its intended use.
c) If an intangible asset is acquired due to a government grant, the asset is not recognized in the accounting records as there is no cost to the entity receiving the intangible asset.
d) The cost of the intangible received in a nonmonetary exchange is the fair value of the consideration given or the fair value of the intangible received, whichever is more clearly evident.
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. Babel Corporation acquired all outstanding shares of Connor Ltd. for $2.1 million. Selected information relating to Connor was as follows:
Fair value of identifiable net assets: $2.0 million
Book value of identifiable net assets: $1.6 million
Cash balance: $0.1 million
Babel will recognize goodwill of
a) $0.1 million.
b) $1.1 million.
c) $2.1 million.
d) $1.5 million.
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2.1 million – $2.0 million = $0.1 million
7. Which of the following legal fees should be capitalized?
Legal fees to
Legal fees to successfully
obtain a franchise defend a trademark
a) No No
b) No Yes
c) Yes Yes
d) Yes No
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. At December 31, 2023, Walker Corp.’s general ledger includes the following account balances:
Copyrights $50,000
Deposits with advertising agency (will be used to promote goodwill) 32,000
Discount on bonds payable 72,700
Excess of cost over fair value of identifiable net assets of
acquired subsidiary 578,000
Trademarks 102,000
In the preparation of Walker’s balance sheet as of December 31, 2023, what should be reported as total intangible assets?
a) $152,000
b) $730,000
c) $762,000
d) $802,700
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $50,000 + $102,000 = $152,000
9. At December 31, 2023, Muriel Corp.’s general ledger includes the following account balances:
Copyrights $50,000
Deposits with advertising agency (will be used to promote goodwill) 32,000
Research costs 72,700
Excess of cost over fair value of identifiable net assets of an
acquired subsidiary 578,000
Trademarks 102,000
In the preparation of Muriel’s balance sheet as of December 31, 2023, what should be reported as goodwill?
a) $152,000
b) $578,000
c) $610,000
d) $762,000
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
10. Which of the following costs would NOT be included in the cost of a patent?
a) cost of purchase from an inventor or owner
b) research costs associated with investigation of new technologies
c) legal fees associated with securing a patent
d) fees associated with successful legal defense of a patent
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
11. When determining whether an internally developed intangible asset should be recognized, the process of generating the intangible is usually broken down into the
a) research and financing elements.
b) acquisition and disposal stages.
c) exploitation and disposal stages.
d) research and development phases.
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
12. 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
a) depreciation deducted as part of research and development costs.
b) research and development expense in the period(s) of construction.
c) depreciation or immediate write-off, depending on company policy.
d) an expense at such time as productive research and development has been obtained from the facility.
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
13. Which of the following research and development related costs should be capitalized and amortized over current and future periods?
a) research and development general laboratory building that can be put to alternative uses in the future
b) inventory used for a specific research project
c) administrative salaries allocated to research and development
d) research findings purchased from another company to aid a particular research project currently in process
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
14. In 2023, Peterson Corporation incurred research costs as follows:
Materials and supplies $60,000
Personnel 65,000
Indirect costs—allocated 80,000
$205,000
These costs relate to a product that Peterson expects to market in 2024. It is estimated that these costs will be recouped by December 31, 2026. How much of these costs could be capitalized in 2023?
a) $205,000
b) $125,000
c) $80,000
d) $0
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $0. Research costs must be expensed.
15. Dover Inc. incurred the following costs during the year ended December 31, 2023:
Laboratory research aimed at discovery of new knowledge $80,000
Design of new products involving new technology 29,000
Testing of new products 19,000
Construction of research and development facilities 120,000
Assuming the 6 specific conditions have been demonstrated, the total amount to be classified as development costs (either deferred or capitalized) in 2023 is
a) $48,000.
b) $80,000.
c) $109,000.
d) $200,000.
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $29,000 + $19,000 = $48,000
16. During 2023, Elysium Inc. incurred the following costs:
Research Expense $360,000
Routine design of tools, jigs, moulds, and dies 250,000
Modification of the formulation of a process 610,000
Development services performed by Orchard Corp. for Elysium 325,000
Assuming the 6 specific conditions have been demonstrated, in 2023, Elysium Corp. would report development costs of
a) $1,545,000.
b) $1,295,000.
c) $935,000.
d) $610,000.
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $610,000 + $325,000 = $935,000
17. Kingship Inc. is developing a new process that it plans to sell. During 2022 and 2023, the company capitalized $1.1 million and $0.2 million respectively. An additional $0.3 million was spent in 2024. During 2024, it became apparent that, due to a lack of financial resources, the company would NOT be able to complete the project. The total amount of capitalized costs relating to this project at the end of 2024 is
a) nil.
b) $1.3 million.
c) $1.0 million.
d) $1.6 million.
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Because the company's inability to complete the project was announced in 2024, the amount spent in 2024 cannot be capitalized. In addition, since no future economic benefit is expected to be realized from the amounts capitalized in earlier years, these must now be written off in 2024.
18. During 2023, Keswick Inc. incurred $343,000 in research costs. How will this affect the company’s 2023 financial statements?
a) Intangible assets and expenses will increase.
b) Intangible assets will decrease, and expenses will increase.
c) Intangible assets will not be affected, and expenses will increase.
d) Intangible assets will increase, and expenses will not be affected.
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
19. Which of the following would likely be classified as a research cost and expensed immediately?
a) testing a new component prior to its use in commercial production
b) redesign of a prototype to improve performance
c) study of the possible uses of a newly developed drug compound
d) costs incurred to improve an existing manufacturing process
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
20. Which of the following is NOT a factor to be considered in determining a limited-life intangible asset’s useful life?
a) the expected useful life of any related asset
b) the effects of obsolescence
c) the value of the asset at the end of its useful life
d) any legal provisions that may limit the useful life
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
21. Intangible assets that have a finite life are amortized over a period NOT to exceed
a) Intangible assets are not amortized.
b) 0 years.
c) its useful life.
d) the legal life.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
22. The reason that the revaluation model is NOT widely used for measuring intangible assets after initial recognition is that
a) it is not allowed under IFRS.
b) the cost method is easier to use.
c) it can be applied only to intangible assets with a fair value determined in an active market.
d) it requires an extensive internal investigation to determine fair value.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
23. An “indefinite life” for an intangible asset means that
a) the asset will last forever.
b) unlimited amortization may be recorded for the asset.
c) amortization is only recorded if future economic benefits can be determined.
d) there appears to be no foreseeable limit to how long the asset will generate positive future cash flows.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
24. If the pattern in which an intangible asset’s benefits will be used up CANNOT be determined, the amortization method most likely to be used is
a) straight-line.
b) capital cost allowance.
c) units of production.
d) double declining-balance.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
25. A change in the amortization rate for an intangible asset should be accounted for as a
a) change in accounting principle.
b) change in reporting entity.
c) correction of an error.
d) change in accounting estimate.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
26. On January 2, 2023, Gold Corp. bought a trademark from River Inc. for $100,000. An independent research company estimated that the remaining useful life of the trademark was 25 years. At this time, the trademark’s net book value in River’s records was $160,000. Because the trademark had a demonstrated limited life beyond 25 years, Gold decided to amortize the trademark over the maximum period, straight-line with no residual. In Gold’s (calendar) 2023 income statement, what amount should be reported as amortization expense for this trademark?
a) $6,400
b) $6,000
c) $5,000
d) $4,000
Difficulty: Medium
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $100,000 / 25 = $4,000
27. On January 1, 2023, Muhlenberg Corp. bought a trademark from Glasgow Corp. for $160,000. An independent consultant retained by Muhlenberg estimated that the remaining useful life is 50 years. The trademark’s carrying value on Glasgow’s books was $61,000. Muhlenberg decided to write off the trademark over the maximum period allowed. How much should be amortized for the year ended December 31, 2023?
a) $1,220
b) $3,200
c) $4,000
d) $8,000
Difficulty: Medium
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $160,000 / 50 = $3,200
28. On January 1, 2019, Michigan Corp. purchased a trademark for $300,000, which had an estimated useful life of 15 years. In January 2023, Michigan paid $44,000 for legal fees in a successful defence of the trademark. The amortization expense for this asset for calendar 2023, should be
a) $24,000.
b) $22,933.
c) $20,000.
d) $0.
Difficulty: Medium
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($300,000 ÷ 15) + ($44,000 ÷ 11) = $24,000
29. On January 1, 2019, Carter Corp. purchased a patent for $350,000, which had an estimated useful life of 20 years. In January 2024, Carter paid $44,000 for legal fees in an unsuccessful defense of the patent. It is estimated the patent will be worthless by the end of 2025. The amortization expense for this asset in the 2024 calendar year, should be
a) 0, the patent is worthless
b) $17,500.
c) $20,433.
d) $131,350.
Difficulty: Medium
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ⟦$350,000 - ($350,000 ÷ 20) x 5 = $262,500⟧ ÷ 2 = $131,350
30. Consider the following information relating to a patent that was purchased in year 1.
Original purchase price (year 1): $625,000
Value of expected future benefits (end of year 2): 600,000
Value of expected future benefits (end of year 3): 584,000
Value of expected future benefits (end of year 4): 561,000
At the end of year 4, the patent’s net carrying value cannot exceed
a) $625,000.
b) $561,000.
c) $584,000.
d) $600,000.
Difficulty: Medium
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
31. Under ASPE, which of the following statements best describes the accounting for intangible assets after acquisition?
a) They may be accounted for under the cost model or the revaluation model.
b) They should be accounted for under the cost model.
c) They should be accounted for under the revaluation model.
d) They must be amortized over a very short period, usually less than five years.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
32. Under IFRS, which of the following statements best describes the accounting for intangible assets after acquisition?
a) They may be accounted for under either the cost model or the revaluation model.
b) They should be accounted for under the cost model.
c) They should be accounted for under the revaluation model if an active market exists for the asset.
d) They should always be accounted for under the revaluation model.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
33. Which of the following is an example of a limited-life intangible asset?
a) patent
b) trade name
c) goodwill
d) trademark
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
34. The cost of a patent should be amortized over its
a) legal life.
b) legal life or useful life, whichever is shorter.
c) legal life or useful life, whichever is longer.
d) Patents are indefinite-life intangibles, and therefore not amortized.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
35. The proper accounting for the costs incurred in creating computer software products that are to be sold, leased, or otherwise marketed to external parties, is to
a) capitalize all costs until the software is sold to external parties.
b) charge research and development expense when incurred until technological feasibility has been established for the product.
c) charge research and development expense only if the computer software has alternative future uses.
d) capitalize all costs as incurred until a detailed program design or working model is created.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
36. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products should be
a) expensed in the current period.
b) amortized over the legal life of the purchased patent.
c) added to factory overhead and allocated to production of the purchaser's product.
d) amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
37. This year, Level Ground Ltd. went to court and successfully defended its trademarked product, "Hot Gum," from infringement by a competitor. Legal costs of this defence should be charged to
a) Trademarks and amortized over the legal life of the trademark.
b) Trademarks and amortized over the same period of time as the “Hot Gum” trademark.
c) Legal Expense and amortized over five years or less.
d) Legal Expense of the period.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
38. If a trademark is developed by the enterprise itself, the costs should be
a) capitalized but not amortized.
b) capitalized only if future benefits are reasonably assured.
c) capitalized, but only from the point in time when all six capitalization criteria are met in the development phase.
d) capitalized as soon as the development phase starts.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
39. A copyright is an example of a(n)
a) customer-related intangible asset.
b) marketing-related intangible asset.
c) contract-based intangible asset.
d) artistic-related intangible asset.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
40. A patent is an example of a(n)
a) technology-based intangible asset.
b) marketing-related intangible asset.
c) contract-based intangible asset.
d) artistic-related intangible asset.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
41. A franchise or licence with a limited life is
a) amortized over the lesser of its legal or useful life.
b) expensed.
c) not amortized.
d) always amortized over its legal life.
Difficulty: Easy
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
42. Cayman Corp. incurred $140,000 of basic research and $35,000 of development costs to develop a product for which a patent was granted on January 2, 2018. Legal fees and other costs associated with registration of the patent totalled $50,000. On March 31, 2023, Cayman paid $75,000 for legal fees in a successful defence of the patent. The total amount capitalized for the patent through March 31, 2023 should be
a) $300,000.
b) $265,000.
c) $160,000.
d) $125,000.
Difficulty: Medium
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $50,000 + $75,000 + $35,000 = $160,000
43. On June 30, 2023, Blue Ltd. exchanged 2,000 Ivy Corp. common shares for a patent owned by Jazz Corp. The Ivy shares were acquired in 2021 for $125,000. At the exchange date, Ivy common shares have a fair value of $80 per share, and the patent had a carrying value of $280,000 on Jazz’s books. Blue should record the patent at
a) $280,000.
b) $160,000.
c) $155,000.
d) $125,000.
Difficulty: Medium
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 2,000 × $80 = $160,000, since we do not have a reliable fair value of the patent received
44. On May 5, 2023, Samson Corp. exchanged 4,000 of its common shares for a copyright owned by Ingleton Ltd. At this date, Samson’s common shares were quoted at $22 per share, and the copyright had a carrying value of $100,000 on Ingleton’s books. Samson should record the copyright at
a) $122,000.
b) $104,000.
c) $100,000.
d) $88,000.
Difficulty: Medium
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 4,000 x $22 = $88,000, since we do not have a reliable fair value of the copyright received
45. Assume that Griffin Inc. purchases as a customer list for $400,000. Legal costs to complete the transaction cost $10,000 and the list is assumed to have a useful life of 10 years. At the beginning of year three, Griffin Inc. discovers that there is currently an active market for customer lists, and it is expected that at the end of 10 years the list would be worth $80,000. What is the carrying value of the customer list at the end of year three?
a) $410,000
b) $297,000
c) $290,000
d) $287,000
Difficulty: Medium
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $410,000 – ($410,000÷10) x 2 = $328,000; ($328,000 – $80,000) ÷ 8 = $31,000, $328,000 – $31,000 = $297,000
46. Assume that Griffin Inc. purchases a customer list for $400,000. Legal costs to complete the transaction cost $10,000 and the list is assumed to have a useful life of 10 years. At the beginning of year three, Griffin Inc. discovers that there is currently an active market for customer lists, and it is expected that at the end of 10 years the list would be worth $80,000. What is the value assigned to amortization expense at the end of year three?
a) $41,000
b) $40,000
c) $31,000
d) $30,000
Difficulty: Medium
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $410,000 – ($410,000÷10) x 2 = $328,000; ($328,000 – $80,000) ÷ 8 = $31,000
47. In its December 31, 2023 financial statements, Preswick Corporation reported $540,000 for a patent it had acquired on January 1, 2019. At the time of purchase, it had a useful life of 20 years. Assuming that no impairments or revisions to the useful life occurred, what was the original purchase price of the patent?
a) $700,000
b) $675,000
c) $540,000
d) $720,000
Difficulty: Medium
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($540,000 ÷ 15) x 5 = $180,000; $180,000 + $540,000 = $720,000
48. An impairment of an identifiable intangible asset arises when its carrying amount exceeds the
a) present value of the expected future net cash flows.
b) expected future economic benefits.
c) asset’s cost.
d) asset’s fair value.
Difficulty: Easy
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
49. Similar to impairment models and standards that apply to long-lived tangible assets, the rational entity impairment model applies also to
a) limited-life intangible assets for organizations using IFRS.
b) indefinite-life intangible assets for organizations using ASPE.
c) indefinite-life intangible asset for organizations using IFRS.
d) limited-life intangible assets for organizations using ASPE.
Difficulty: Easy
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
50. Under ASPE, to determine if there is an impairment loss, compare the
a) fair value of the identifiable assets to the book value of the assets.
b) fair value of the reporting unit to the carrying value of the reporting unit.
c) imputed current fair value of the assets with the carrying value of the assets.
d) imputed carrying value of the assets with the fair value of the assets.
Difficulty: Easy
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
51. Which of the following is the impairment test for indefinite-life intangibles?
a) recoverability test and then fair value test
b) fair value test and then recoverability test
c) recoverability test
d) fair value test
Difficulty: Easy
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
52. In January, 2018, Tillicum Corp. purchased a patent for a new consumer product for $900,000. At the time of purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2023, the product was permanently removed from the market because of a potential health hazard. What amount should Tillicum recognize as an impairment loss for calendar 2023, assuming amortization has been recorded annually using the straight-line method with no residual value?
a) $600,000
b) $450,000
c) $90,000
d) $60,000
Difficulty: Medium
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($900,000 ÷ 10) × 5 = $450,000 amortization already recorded
carrying value is $900,000 – $450,000 = $450,000
impairment is $0 – $450,000 = $450,000
53. On January 2, 2020, Albion Corp. purchased a patent for a new consumer product for $45,000. At the time of purchase, the patent was valid for 15 years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2023, the product was permanently removed from the market because of a potential health hazard. What amount should Albion recognize as an impairment loss for calendar 2023, assuming amortization has been recorded annually using the straight-line method with no residual value?
a) $4,500
b) $27,000
c) $31,500
d) $36,000
Difficulty: Medium
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($45,000 ÷ 10) × 3 = $13,500 amortization already recorded
carrying value is $45,000 – $13,500 = $31,500
impairment is $0 – $31,500 = $31,500
54. Mandolin Inc. purchases a patent on January 1, 2018 for $118,800. At the time of purchase, Mandolin estimated that the patent had a useful life of 12 years. The company uses the straight-line method to amortize the patent, and annual impairment tests showed no impairment of the patent’s value. The patent is sold on January 1, 2023, for $84,600. Which of the following is recorded when the asset is sold?
a) dr. Loss on disposal $15,300
b) cr. Patents $84,600
c) dr. Accumulated amortization $49,500
d) cr. Gain on disposal $5,400
Difficulty: Medium
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: (Cost $118,800 ÷ 12 years = $9,900 per year amortization) x 5 years = $49,500 accumulated amortization
55. Violin Inc. is a private corporation following ASPE. On January 2, 2022 it purchased a limited-life licence for $50,000. This licence has a ten-year life that is NOT renewable. The company uses straight-line amortization and on December 31, 2023, Violin estimates that the undiscounted net cash flows of this licence is $38,000, while the fair value (discounted net future cash flows) is $32,000. What is the impairment loss?
a) Nil, the asset is not impaired
b) $2,000
c) $8,000
d) $12,000
Difficulty: Medium
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Carrying value at Dec 31/23 = $50,000 – [($50,000 ÷ 10) x 2 years] = $40,000
Recoverability test: $40,000 – $38,000 = $2,000. $40,000 – $32,000 = $8,000
56. Which of the following is correct regarding the rational entity impairment model?
a) For limited-life intangibles, IFRS requires that the rational entity impairment model be applied.
b) For limited-life intangibles, ASPE requires that the rational entity impairment model be applied.
c) For indefinite-life intangibles, ASPE requires that the rational entity impairment model be applied.
d) Neither ASPE nor IFRS allow the use of the rational entity impairment model.
Difficulty: Easy
Learning Objective: Explain and account for impairment and derecognition of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
57. Goodwill is the excess of the purchase price of the acquired enterprise over the
a) fair value of the tangible net assets acquired.
b) book value of the identifiable net assets acquired.
c) book value of the tangible net assets acquired.
d) fair value of the identifiable net assets acquired.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
58. Which of the following is NOT a specifically identifiable intangible asset?
a) patents
b) trademarks
c) goodwill
d) copyrights
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
59. Under IFRS, to determine if there is an impairment of goodwill, compare the
a) fair value of the identifiable assets to the book value of the assets.
b) fair value of the reporting unit to the carrying value of the reporting unit.
c) imputed current fair value of goodwill with the carrying value of goodwill.
d) carrying amount of the CGU with the recoverable amount.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
60. Goodwill may be
a) capitalized only when purchased.
b) capitalized either when purchased or created internally.
c) capitalized only when created internally.
d) written off directly to retained earnings.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
61. Internally generated goodwill
a) is not possible.
b) may be capitalized or expensed.
c) is not capitalized.
d) is capitalized but not amortized.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
62. Purchased goodwill should
a) be expensed as soon as possible against retained earnings.
b) be expensed as soon as possible to other comprehensive income.
c) be amortized over the period benefited, but not more than 40 years.
d) not be expensed or amortized, but rather reduced only if impairment occurs.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
63. Negative goodwill arises when
a) the book value of identifiable net assets acquired exceeds the purchase price.
b) the fair value of identifiable net assets acquired exceeds the purchase price.
c) the fair value of identifiable net assets acquired is less than the purchase price.
d) the fair value of identifiable net assets acquired exceeds the book value.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
64. If the fair value of the net assets acquired in a business combination is greater than the purchase price, the difference is called
a) organizational costs.
b) contributed surplus.
c) purchased goodwill.
d) negative goodwill or bargain purchase.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
65. During 2023, Spokane Ltd. purchased the net assets of Tacoma Corp. for $635,000. On the date of the transaction, Tacoma reported $200,000 in liabilities. As well, the fair value of Tacoma’s assets was:
Current assets $ 60,000
Non-current assets 840,000
$1,200,000
How should the difference between the fair value of the net assets acquired and the cost be accounted for by Spokane?
a) The difference should be credited to retained earnings.
b) The difference should be recognized as a gain in net income.
c) The noncurrent assets should be reduced appropriately.
d) The difference should be prorated between the current and the noncurrent assets.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
66. Which of the following costs of goodwill should be capitalized?
Costs of goodwill
from a business
combination accounted Costs of developing
for as a purchase goodwill internally
a) No No
b) No Yes
c) Yes Yes
d) Yes No
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
67. Howdy Manufacturing Corp. decided to expand further by purchasing the net assets of Doody Manufacturing Corp. Doody’s statement of financial position at December 31, 2023 includes the following information:
Cash $210,000
Receivables 450,000
Inventory 275,000
Plant assets (net) 1,025,000
Accounts Payable………………… $325,000
An appraisal indicates that the fair value of the inventory is $320,000 and the fair value of the plant assets is $1,225,000. What value is allocated to goodwill if Howdy purchases Doody for $3,000,000?
a) $1,365,000
b) $1,120,000
c) $715,000
d) nil, there is no goodwill
Difficulty: Medium
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $3,000,000 – ($210,000+$450,000+320,000+$1,225,000-$325,000) = $1,120,000
68. On January 1, 2023, Mickey Corporation acquired Minnie Media for a cash payment of $859,100. At the time of purchase, the fair value of Minnie’s assets is $899,600, and the fair value of the liabilities is $462,300. At December 31, 2023 Mickey’s asset carrying value (including goodwill) is $3,617,400 and the fair value is $3,553,200. What value was assigned to goodwill as a result of the Minnie Media purchase? Mickey Inc. uses ASPE.
a) $64,200
b) $437,300
c) $421,800
d) $40,500 of negative goodwill
Difficulty: Medium
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $899,600 – $462,300= $437,300; $859,100 – $437,300 = $421,800
69. The steps involved in testing goodwill for impairment using ASPE does NOT include
a) comparing the current implied fair value of goodwill with its carrying amount.
b) comparing the fair value of the reporting unit against its carrying amount including goodwill.
c) calculating the implied current fair value of goodwill.
d) All of these steps are involved in testing goodwill for impairment using ASPE.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
70. Under IFRS, which of the following statements best describes when goodwill should be tested for impairment?
a) Goodwill should be tested for impairment when events or changes in circumstance indicate that impairment may have occurred.
b) Goodwill should be tested annually for impairment regardless of the circumstances.
c) Goodwill should be tested for impairment annually and whenever events or changes in circumstance indicate that impairment may have occurred.
d) Goodwill should only be tested for impairment when the company follows a policy to amortize its goodwill.
Difficulty: Easy
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
71. Under ASPE, which of the following statements best describes when goodwill should be tested for impairment?
a) Goodwill should be tested for impairment when events or changes in circumstances indicate that impairment may have occurred.
b) Goodwill should be tested annually for impairment regardless of the circumstances.
c) Goodwill should be tested for impairment annually and whenever events or changes in circumstance indicate that impairment may have occurred.
d) Goodwill should only be tested for impairment when the company follows a policy to amortize its goodwill.
Difficulty: Easy
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
72. Which of the following statements best describes when previously recognized goodwill impairment may be reversed?
a) Reversals are permitted under both ASPE and IFRS.
b) Reversals are permitted under ASPE but not IFRS.
c) Reversals are permitted under IFRS but not ASPE.
d) Reversals are not permitted under either IFRS or ASPE.
Difficulty: Easy
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
73. Goodwill was purchased when a business was acquired. When it is determined that the goodwill is impaired, the credit is usually made to
a) the Goodwill account.
b) an Accumulated Impairment Loss account.
c) a Deferred Credit account.
d) a Shareholders' Equity account.
Difficulty: Easy
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
74. On September 2023, Princes Corporation acquired Royal Mile Incorporated for a cash payment of $864,300. At the time of the purchase, Royal Mile’s statement of financial position showed assets of $890,600, liabilities of $469,700, and owners’ equity of $420,900. The fair value of Royal Mile’s assets is estimated to be $1,162,900. Assume that Princes Corporation is a public company and that the goodwill was allocated entirely to one cash-generating unit (GU). Two years later, the CGU’s carrying amount is $3,530,300, the value in use is $3,458,200, and the fair value less costs to sell is $3,058,200. Goodwill is
a) not impaired.
b) impaired by $72,100.
c) impaired by $472,100.
d) Not enough information is provided to assess impairment.
Difficulty: Medium
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $3,530,300 carrying amount – $3,458,200 value in use = $72,100 amount of impairment
75. On January 1, 2023, Mickey Corporation acquired Minnie Media for a cash payment of $859,100. At the time of purchase, Minnie’s statement of financial position showed assets of $899,600, liabilities of $462,300, and owner’s equity of $437,300. The fair value of Minnie’s assets is estimated to be $1,163,900. At December 31, 2023 Mickey’s asset carrying value (including goodwill) is $3,617,400 and the fair value is $3,553,200. What is the value of the impairment loss? Mickey Inc. uses ASPE.
a) nil, there is no impairment
b) $64,200
c) $304,800
d) $437,300
Difficulty: Medium
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $3,617,400 – $3,553,200 = $64,200
76. Regarding trends in intangible asset reporting, which of the following statements is NOT true?
a) Intangible assets, along with goodwill, have been decreasing as a proportion of companies’ reported assets.
b) The most common types of intangible assets reported are broadcast rights, publishing rights, trademarks, patents, licences, customer lists, non-competition agreements, franchises, and purchased R&D.
c) Intangibles are an important contributor to entity performance and financial position.
d) Intangible assets, along with goodwill, have been increasing as a proportion of companies’ reported assets.
Difficulty: Easy
Learning Objective: Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
77. The significant difference between market capitalization and book value of companies like Apple Inc. holding sizeable knowledge assets or intellectual capital is an example of
a) the tradeoff between timeliness and accuracy.
b) the tradeoff between relevance and reliability.
c) the tradeoff between cost and fair value reporting.
d) the decreasing emphasis on representational faithfulness.
Difficulty: Easy
Learning Objective: Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
78. For each class of intangible asset, all of the following information is required to be disclosed, except for
a) the fair value of the intangible assets, as well as the difference between the fair value and the carrying value.
b) a reconciliation of the opening and ending balances of their carrying amount and accumulated amortization and impairment losses.
c) impairment losses and reversals of impairment losses.
d) information regarding whether the intangibles are indefinite or finite (limited), useful life, methods and rates of amortization.
Difficulty: Easy
Learning Objective: Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
79. Which of the following statements regarding comparability of the intangible assets on financial statements between companies is correct?
a) Provided the companies being examined both use IFRS comparability is assured.
b) It is important to examine how the intangibles are being accounted for and how accounting policies are being used.
c) The proper application of GAAP ensures that statements for companies in the same industry are comparable.
d) There are few differences between ASPE and IFRS, making intra-company comparison fairly easy.
Difficulty: Easy
Learning Objective: Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*80. Which of the following explains the rationale for using “normalized” earnings under the excess-earnings valuation approach?
a) Historic asset values are the best reflection of the assets’ value in use.
b) The company’s future earnings should always be higher than the past earnings.
c) The past often provides useful information about the future; past earnings are a good starting point.
d) Normalized earnings are not used under the excess-earnings valuation approach.
Difficulty: Easy
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*81. Which of the following is NOT true of the earnings normalization process?
a) Accounting policies applied should be consistent with those of the purchaser.
b) Future earnings should be based on the net assets’ current fair values.
c) Amounts that are not expected to recur should be adjusted out of our calculations.
d) All of these statements are true of the earnings normalization process.
Difficulty: Easy
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*82. Which of the following is NOT a method of valuing goodwill?
a) excess-earnings approach
b) total earnings approach
c) discounted free cash flow method
d) undiscounted free cash flow method
Difficulty: Easy
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
*83. Assuming the fair value of Frosty's net assets is $10.2 million, and Casper acquires a 75% share, goodwill can be calculated as
a) $1,550,000.
b) $1,243,000.
c) $1,000,000.
d) $750,000.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $9,200,000 – (75% x $10,200,000) = $1,550,000
*84. Assuming the fair value of Frosty's net assets is $12.5 million, and Casper acquires a 75% share, goodwill can be calculated as
a) $375,000.
b) $175,000 negative.
c) $175,000.
d) $0.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $9,200,000 – (75% x $12,500,000) = $175,000 negative
*85. Icicle Corp.'s average annual net income is $50,000 above the average for Icicle’s industry. Snowy is interested in purchasing Icicle. Assuming Snowy estimates goodwill by capitalizing excess earnings at 13%, the estimated goodwill (to the nearest dollar) is
a) $753,846.
b) $685,162.
c) $384,615.
d) $0.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $50,000 / 0.13 = $384,615
*86. The owners of Dallas Electronics Store are contemplating selling the business. The cumulative earnings for the past 5 years totalled $900,000, including a gain on discontinued operations of $30,000. The annual earnings based on an average rate of return on investment for this industry would have been $138,000. If excess earnings are to be capitalized at 15%, then implied goodwill should be
a) $210,000.
b) $280,000.
c) $240,000.
d) $870,000.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $900,000 – $30,000 – $138,000 = $36,000
5
$36,000 = $240,000
.15
Use the following information for questions *87–*88.
Jeremiah Inc. is being targeted for acquisition by Argo Corporation. As an analyst for Argo, you are asked to determine the goodwill that, pending various assumptions, may be inherent in this potential transaction.
The available information relating to Jeremiah includes the following:
Current net assets: $5.1 million
Expected return on net assets for industry: 10%
Reported net income for the previous six consecutive years:
Year Amount Year Amount
2018 $710,000 2021 $745,000
2019 $680,000 2022 $815,000
2020 $980,000 2023 $835,000
Net income for 2023 included a $200,000 gain from the sale of a discontinued operation.
*87. Estimated goodwill by capitalizing average excess earnings at 14% is
a) $2,029,762.
b) $1,791,667.
c) $1,654,331.
d) $760,833.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $710,000 + $680,000 + $980,000 + $745,000 + $815,000 + $835,000 =
$4,765,000
[($4,765,000 – $200,000) ÷ 6] – ($5,100,000 ×.10) = $250,833
$250,833 ÷.14 = $1,791,667
*88. Assuming that excess earnings are expected to continue for 8 years, and ignoring the time value of money, estimated goodwill is
a) $2,273,000.
b) $2,006,667.
c) $1,854,333.
d) $1,531,733.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $250,833 x 8 = $2,006,667
*89. The owners of Etzy Inc. are planning to sell the business. The cumulative earnings for the past five years are $600,000 including non-recurring losses of $100,000. The annual earnings based on an average rate of return for this industry would be $80,000. If excess earnings are to be capitalized at 12%, what is the implied goodwill? Round to the nearest whole number.
a) $166,667
b) $333,333
c) $500,000
d) $66,667
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($600,000 + $100,000) ÷ 5 = $140,000; $140,000 – $80,000 = $60,000; $60,000 ÷.12 = $500,000
Exercises
Ex. 12-90 Intangible assets and goodwill
Explain the three main characteristics of intangible assets. Is goodwill an intangible asset? Why, or why not? As part of your explanation include a discussion on how goodwill can be calculated and whether it can be sold?
Solution 12-90
The three main characteristics of intangible assets are that they
1. are identifiable: Resulting from contractual or other legal rights and/or separable.
2. lack physical substance: The value of intangible assets comes from the rights and privileges grated to the company using them.
3. are nonmonetary: Do not contain a right (or claim) to receive fixed or determinable amounts of money in the future.
Goodwill is not an intangible asset because it does not meet the first criterion. It is not separable from the rest of the entity and does not result from contractual or legal rights. For example, synergies of a combined sales force or superior management team cannot be separated from an entity in order to exchange with others. The amount recognized as goodwill is the difference between the fair value of the consideration transferred to acquire the business and the fair value amounts assigned to the identifiable net assets.
The only way goodwill can be sold is to sell the business. This is because goodwill is an unidentified excess or residual amount and can only be calculated and expressed in relation to the business as whole.
Difficulty: Easy
Learning Objective: Understand the importance of goodwill and intangible assets from a business perspective and describe their characteristics.
Section Reference: The Business Importance and Characteristics of Goodwill and Intangible Assets
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 12-91 Intangible assets theory and terminology
It has been argued on the grounds of conservatism that all intangible assets should be written off immediately after acquisition. Discuss the accounting arguments against this treatment.
Keeping this in mind, identify each of the following activities. Indicate whether these items would be treated as an intangible asset, and it so whether they have a definite or indefinite life.
1. In a business combination, the difference between the fair value of the consideration given and the fair values assigned to the identifiable net assets
2. When identifiable net assets are acquired at a price that is below their fair value
3. A lease that includes terms that are more favourable than the current market terms for a comparable lease
4. Planned investigation undertaken anticipating that new scientific or technical knowledge and understanding will be gained
5. Translation of research findings or other knowledge into a plan or design for new or substantially improved materials, products, processes, systems or services
6. A database including customer names, contact information, order history, and demographic information
7. An exclusive right that is granted for the life of the creator plus 50 years
Solution 12-91
Intangible assets may have future revenue producing ability, like tangible assets. The costs, therefore, should be capitalized, deferred, and matched as closely as possible against those revenues. Definite-life intangible assets should be amortized over the lesser of their useful and legal lives; indefinite-life intangibles are NOT amortized. Both types of intangibles should be tested regularly for impairment.
1. Goodwill, intangible asset with an indefinite life
2. Negative goodwill or bargain purchase
3. A favourable lease
4. Research
5. Development, intangible assets with a definite life
6. Customer list, intangible asset with an indefinite life
7. Copyright, intangible assets with a definite life
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 12-92 Journal entries for patent purchase
CSI Products Ltd. purchased a patent on January 1, 2023, for $1,120,000. At the time of the purchase, the patent had a remaining legal life of 20 years. In January 2026, CSI spent $92,000 successfully defending the patent in court. One of the other results of the court case was the discovery that the patent would only have a remaining useful life of 9 years. CSI’s year end was December 31.
Instructions
Prepare the entries on the books of CSI to record a) the purchase of the patent, b) the amortization for the first year (2023), c) the defence of the patent, and d) amortization for 2026.
Solution 12-92
a) Intangible Assets—Patents 1,120,000
Cash 1,120,000
To record the purchase of the patent
b) Patent Amortization Expense 56,000
Accumulated Amortization—Patents 56,000
To record 2023 amortization
c) Intangible Assets—Patents 92,000
Cash 92,000
To record the legal defence of the patent
d) Patent Amortization Expense 116,000
Accumulated Amortization—Patents 116,000
To record 2026 amortization
Calculations:
*$56,000/ year amortization charge x 3 years = $168,000
$1,120,000 – $168,000 = $952,000 carrying value
$952,000 carrying value + $92,000 legal costs = $1,044,000 revised cost
$1,044,000 ÷ 9 years = $116,000 / year revised amortization
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-93 Carrying value of patent
On July 1, 2020, Dominica Corp. purchased a patent from Surama Ltd. for $60,000. On July 1, 2023, Dominica paid $12,000 for successful litigation in defence of the patent. Dominica estimates that the useful life of the patent will be 15 years from the date of acquisition.
Instructions
Prepare a calculation of the carrying value of the patent at December 31, 2023. Label all calculations.
Solution 12-93
Cost of patent $60,000
Amortization Jul 1/20 to Jul 1/23 ($60,000 ÷ 15) × 3 (12,000)
Carrying value at Jul 1/23 48,000
Add cost of successful defence 12,000
Carrying value 60,000
Amortization Jul 1 to Dec 31/23 [$60,000 ÷ (15 – 3)] × 1/2 (2,500)
Carrying value at Dec 31/23 $57,500
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement after Acquisition
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-94 Journal entries for patent sale
Amplify Inc. purchased a patent on September 1, 2023 for $41,080. At the time of purchase, Amplify estimated that the patent’s economic benefits would last until the end of 2027. Amplify’s fiscal year end is December 31. On April 1, 2026, Amplify sold the patent to another company.
Instructions
a) Prepare the journal entry to record the sale, assuming Amplify sold the patent for $21,690.
b) Prepare the journal entry to record the sale, assuming Amplify sold the patent for $12,240.
Solution 12-94
a) Cash 21,690
Accumulated Amortization—Patents 24,490
Patents 41,080
Gain on Disposal of Intangible Assets 5,100
b) Cash 12,240
Accumulated Amortization—Patents 24,490
Loss on Disposal of Intangible Assets 4,350
Patents 41,080
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement after Acquisition
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-95 Intangible asset impairment
Roi Inc. is a private corporation following ASPE. On January 2, 2023 it purchased a limited-life licence for $50,000. This licence has a ten-year life and is NOT renewable. Straight-line amortization will be used. At December 31, 2024, Roi estimates that the undiscounted net cash flows of this licence is $38,000, and the fair value (discounted net future cash flows) of this licence is $32,000.
Instructions
a) Calculate the amount of impairment (if any) for this asset.
b) Prepare the adjusting entry required to reflect any impairment.
Solution 12-95
a) Carrying value at Dec 31/24 = $50,000 – [($50,000/10) x 2 years] = $40,000
Recoverability test: $40,000 – $38,000 = $2,000. Therefore, the asset is impaired.
Impairment is $40,000 – $32,000 = $8,000
b) AJE required at Dec 31/24
Loss on Impairment 8,000
Accumulated Impairment Losses—Licences 8,000
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets at Acquisition
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-96 Capitalization of R&D costs
Carmanah Industries Ltd. Is a company in the high-technology industry. Carmanah has been working on developing a new solar panel technology. The technology meets all of the six criteria required in order to capitalize development costs. During 2023, Carmanah incurred the following costs related to research and development:
Rent of facility $250,000
Salaries of research staff 290,000
Legal costs to obtain new patent for technology 40,000
Legal costs of defending new patent in court 36,000
Materials consumed in manufacture of prototypes 13,100
Consulting fees paid for general research 45,200
Indirect costs related to research and development 9,700
Instructions
Calculate the amount that Carmanah would be allowed to capitalize as an intangible asset for 2023, assuming that Carmanah follows IFRS.
Solution 12-96
Legal costs to obtain new patent for technology $40,000
Legal costs of defending new patent in court 36,000
Materials consumed in manufacture of prototypes 13,100
Total capitalizable under IFRS $89,100
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-97 Identifying R&D stage activities
Provide some examples of activities in each of the research and development phases. If there is uncertainty about which phase a particular activity relates to when internally creating an intangible asset, which classification should it be assigned?
Solution 12-97
Research stage activities include:
- obtaining new knowledge
- searching for, evaluating, and selecting ways to use research findings or knowledge
- investigating possible alternatives for materials, products, processes, systems, and services
- formulating, designing, evaluating, and choosing possible alternatives for new or existing materials, products, processes, systems, and services
Development stage activities include:
- designing, constructing, and testing prototypes and models prior to production or use
- designing tools, jigs, molds, and dies involving new technology
- designing, constructing, and operating pilot plants that are not economically feasible for commercial production
- designing, constructing, and testing chosen alternatives for new or improved materials, products, processes, systems, and services.
If there is uncertainty about which phase a particular activity relates to when internally creating an intangible asset, it is classified only as a research phase activity.
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 12-98 Criteria for capitalization of development costs
List the criteria that must be met before development costs of a project may be capitalized.
Solution 12-98
The six criteria that must be met are:
1. technical feasibility of completing the intangible asset,
2. the entity’s intention to complete it for use or sale,
3. the entity’s ability to use or sell it,
4. availability of technical, financial, and other resources needed to complete, use or sell it,
5. the way in which the future economic benefits will be received; including the existence of a market for the asset if it will be sold, or its usefulness to the entity if it will be used internally,
6. the ability to reliably measure the costs associated with and attributed to the intangible asset during its development.
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. 12-99 Intangible assets definitions and descriptions
Provide clear, concise answers for the following:
1. What are intangible assets?
2. How are research costs accounted for?
3. How are development costs accounted for?
4. What are the two models that are used to measure intangible assets after initial acquisition?
5. What are the factors that should be considered when determining the useful life of limited-life intangible assets?
6. What are the major categories of intangible assets?
7. What are the two models that are used to account for the impairment of intangible assets?
8. How can an entity that acquires control over one or more businesses account for intangible assets when they are not identifiable?
Solution 12-99
1. Intangible assets are assets that are individually identifiable, lack physical substance, and are nonmonetary in nature.
2. Research costs do not, by definition, meet the criteria for recognition as an asset. As a result, they must be recognized as expenses when they are incurred.
3. Development costs may be recognized as intangible assets, provided that future economic benefits can be demonstrated. That demonstration includes the satisfaction of six specific conditions.
4. The models are the cost model and the revaluation model.
5. Factors to be considered are the expected use of the asset; legal, contractual or regulatory provisions; potential obsolescence, demand, competition, and other economic factors; and the expected expenditures for its maintenance.
6. The major categories are marketing-related, customer-related, artistic-related, contract-based, and technology-based intangible assets.
7. The two models are the cost recovery impairment model and the rational entity impairment model. The first is used for ASPE and the latter is used in IFRS.
8. When one entity acquires control over one or more businesses, the entity has to account for all the assets that are acquired, regardless of whether or not they are recognized. Many of the assets acquired that contribute to the value of the business are intangible, but only those that are identifiable can be separately recognized. Intangibles acquired that are not identifiable assets are considered part of goodwill.
Difficulty: Easy
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement after Acquisition
Learning Objective: Identify and explain the accounting for specific types of intangible assets.
Section Reference: Specific Intangibles
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 12-100 Revaluation model limitations with intangible assets
Why is the revaluation model NOT widely used for measuring intangible assets after initial recognition?
Solution 12-100
The reason is simply that it can be applied only to intangible assets that have a fair value determined in an active market. This limits its use to situations where the items are homogeneous (interchangeable), there is a good supply of willing buyers and sellers, and the prices are available to the public. An active securities market, such as the Toronto Stock Exchange, exists for equity securities, but active markets do not ordinarily exist for intangible assets.
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition
Section Reference: Recognition and Measurement after Acquisition.
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 12-101 Indefinite versus infinite useful life and technology-based assets
Is there a difference between assets with an indefinite useful life versus an infinite useful life? Provide an example of a technology-based intangible asset. Over what period should these types of assets be amortized?
Solution 12-101
An indefinite life does not mean “infinite”—that the asset will last forever. Instead, it means that, after looking at all relevant factors, there appears to be no foreseeable limit to how long the asset will generate positive net cash flows for the entity.
Technology-based intangible assets relate to innovations or technological advances. A common example is patents. Patents are granted for products and processes that are new, workable, and ingenious. A patent gives the holder the right to exclude others from making, selling, or using a product or process for a period of 20 years from the date the patent application is filed with the Patent Office.
The cost of a patent is amortized over the shorter of its legal life or its useful life to the entity.
(Students may provide other examples, though patents are the most common way to retain ownership of specific technologies).
Difficulty: Easy
Learning Objective: Explain how intangible assets are accounted for after initial recognition
Section Reference: Recognition and Measurement after Acquisition.
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 12-102 Intangible asset impairment
Picot Collective purchases a patent on January 1, 2018 for $118,800. At the time of purchase, Picot estimated that the patent had a useful life of 12 years. Picot used the straight-line method to amortize the patent, and annual impairment tests showed no impairment of the patent’s value. On January 1, 2023, Picot sold the patent for $84,600.
Instructions
Prepare the journal entry to record the sale of the patent.
Solution 12-102
Jan 1. Cash 84,600
Accumulated Amortization—Patents 49,500
Patents 118,800
Gain on Disposal of Intangible Assets 15,300
Calculations:
Cost $118,800 ÷ 12 years = $9,900 per year amortization
$9,900/year x 5 years = $49,500 amortized
Cost $118,800 – $49,500 amortized = $69,300 carrying value
Difficulty: Medium
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-103 Alternative treatments of goodwill after recognition
Once goodwill has been recognized in the accounts, there has been much disagreement over how it should be treated in subsequent periods. Discuss the alternative treatment approaches.
Solution 12-103
1. Charge goodwill off immediately to shareholders’ equity. Goodwill is not an asset that is separable from the business itself and therefore should not be recognized as a separate asset. In addition, immediate expensing would be consistent with the expensing of costs of internally generated goodwill. As well, there is no rational method to amortize goodwill, due to the many uncertainties involved; therefore, financial statements will be more reliable if it is expensed.
2. Amortize goodwill over its useful life. Goodwill at the time of purchase erodes in value over time and therefore it should be charged to income over the estimated period in which it is expected to benefit the business.
3. Retain goodwill indefinitely at cost (i.e., do not amortize), unless impairment occurs. Current and future expenses help to maintain existing goodwill; therefore, it can have an indefinite life. Amortization of goodwill is entirely arbitrary and leads to distortions of net income.
Difficulty: Easy
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 12-104 Acquisition of tangible and intangible assets
Abe Manufacturing Corp. decided to expand further by purchasing the net assets of ERB Manufacturing Corp. ERB’s statement of financial position at December 31, 2023 follows.
ERB MANUFACTURING CORP.
Statement of Financial Position
December 31, 2023
Assets Liabilities and Equities
Cash $ 210,000 Accounts payable $ 325,000
Receivables 450,000 Common shares 800,000
Inventory 275,000 Retained earnings 835,000
Plant assets (net) 1,025,000
Total assets $1,960,000 Total liabilities and equities $1,960,000
An appraisal, agreed to by both parties, indicated that the fair value of the inventory was $320,000 and the fair value of the plant assets was $1,225,000. The fair value of the receivables and payables is equal to the amount reported on the balance sheet. The agreed purchase price was $3 million, and this amount was paid in cash to the owners of ERB.
Instructions
Calculate the amount of goodwill (if any) implied in the purchase price of $3 million. Show calculations.
Solution 12-104
Purchase price $3,000,000
Less tangible net assets acquired:
Cash $210,000
Receivables (FV) 450,000
Inventory (FV) 320,000
Plant assets (FV) 1,225,000
Less accounts payable (FV) (325,000)
Total fair market value of tangible net assets acquired 1,880,000
Implied goodwill $1,120,000
Difficulty: Medium
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill—Recognition and Measurement
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-105 Goodwill measurement and recording
Snoopy Inc. is considering purchasing the net assets of Woodstock Corporation. Following is the statement of financial position of Woodstock as at December 31, 2023.
WOODSTOCK CORPORATION | |
Statement of Financial Position | |
As at December 31, 2023 | |
Current assets | $ 231,400 |
Buildings and equipment | 753,000 |
Accumulated amortization | (113,000) |
Land | 173,000 |
Total assets | $1,044,400 |
Current liabilities | $187,000 |
Common shares | 577,000 |
Retained earnings | 280,400 |
Total liabilities and equity | $1,044,400 |
Following are the fair values of Woodstock’s net assets as at December 31, 2023.
Current assets | $225,500 |
Buildings and equipment | 482,600 |
Land | 313,500 |
Current liabilities | (166,300) |
$855,300 |
Instructions
Calculate the value of goodwill that would be recorded by Snoopy if it offered $2,060,300 for the net assets of Woodstock Corporation.
Solution 12-105
Fair value of consideration transferred | $2,060,300 | |
Fair value of identifiable net assets: | ||
Current assets | $225,500 | |
Building and equipment | 482,600 | |
Land | 313,500 | |
Current liabilities | (166,300) | 855,300 |
Value assigned to goodwill | $1,205,000 |
Difficulty: Medium
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-106 Goodwill impairment
On September 1, 2023, Piper Corporation acquired Darcy Enterprises for a cash payment of $850,000. At the time of purchase, Darcy’s statement of financial position showed assets of $890,000, liabilities of $450,000, and owner’s equity of $440,000. The fair value of Darcy’s assets is estimated to be $1,150,000. Assume that Piper is a public company and the goodwill was allocated entirely to one cash-generating unit (CGU). Two years later, the CGU’s carrying amount is $3,450,000; its value in use is $3,380,000; the fair value less costs to sell is $2,980,000.
Instructions
Determine if goodwill is impaired and calculate the goodwill impairment loss.
Solution 12-106
Under IFRS, the recoverable amount of the CGU is compared with its carrying amount to determine if there is any impairment.
Based on the information provided, the recoverable amount of the CGU is the greater of:
● | Fair value − costs to sell = $2,980,000 |
● | Value in use = $3,380,000 |
Recoverable amount of CGU | $3,380,000 |
Carrying amount of CGU | $3,450,000 |
The goodwill is impaired because the carrying amount of the CGU > the recoverable amount of the CGU. The goodwill impairment loss is $70,000 ($3,450,000 – $3,380,000).
Difficulty: Medium
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Goodwill
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Impairment of Goodwill
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-107 Determining impairment loss under ASPE
On September 1, 2023, Humble Corporation acquired Roots Media for a cash payment of $859,100. At the time of purchase, Roots’ statement of financial position showed assets of $899,600, liabilities of $462,300, and owner’s equity of $437,300. The fair value of Roots’ assets is estimated to be $1,163,900.
Instructions
a) Assuming that Humble Corporation is a private entity, explain how goodwill will be tested for impairment.
b) If the unit’s carrying amount (including goodwill) is $3,617,400 and its fair value is $3,553,200, what is the impairment loss, if any, under ASPE?
Solution 12-107
a) Under ASPE, goodwill is assigned to a reporting unit at the acquisition date. Goodwill is tested for impairment when events or changes in circumstances indicate impairment may exist.
There is an impairment loss if the carrying amount of the reporting unit (including goodwill) exceeds the fair value of the reporting unit.
b)
Carrying amount of unit $3,617,400
Fair value of unit 3,553,200
Impairment loss $ 64,200
Difficulty: Medium
Learning Objective: Explain how goodwill is measured and accounted for after acquisition.
Section Reference: Recognition and Measurement of Goodwill
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Impairment of Goodwill
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication
Ex. 12-108 Reporting a patent purchase
Comox Corporation has a December 31 fiscal year end. Comox purchased a patent from Courtney Inc. for $400,000 on January 1, 2020. The patent expires on January 1, 2028. Comox has been amortizing it over its legal life. During 2023, Comox determined that the patent’s economic benefits would NOT last longer than six years from the date of acquisition.
Instructions
Determine the amount that will be reported on
a) Comox’s December 31, 2022 and 2023, statements of financial position.
b) Comox’s 2023 income statement. Be specific about the account name and the account.
Solution 12-108
a) Assets: Patent Dec. 31, 2022 $250,000 Dec. 31,2023 $166,667
Patent | Cost | Amortization | Carrying Amount |
Purchase price Jan. 1, 2020 | $400,000 | ||
Amortization 2020 (1) | $50,000 | ||
Amortization 2021 | 50,000 | ||
Amortization 2022 | 50,000 | ||
Balance Dec. 31, 2022 | $250,000 | ||
Amortization 2023 (2) | $83,333 | ||
Balance Dec. 31, 2023 | $166,667 |
(1) | Amortization 2020 | ($400,000 ÷ 8 years) | $50,000 |
(2) | Amortization 2023 | Carrying amount ÷ (6 – 3 years) = $250,000 ÷ 3 | $83,333 |
b)
COMOX CORPORATION
Income Statement (Partial)
For the year ended December 31, 2023
Operating Expenses
Amortization Expense—Patents $83,333
Difficulty: Medium
Learning Objective: Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 12-109 Disclosures required for internally generated intangible assets
Briefly outline what information is required to be disclosed for each class of intangible asset. What is the goal of these disclosures for publicly accountable entities?
Solution 12-109
For each class of intangible asset, and separately for internally generated intangibles and other intangible assets, the following information is required:
- Whether their lives are indefinite or finite (limited), useful life, methods and rates of amortization, and the line where amortization is included on the statement of comprehensive income;
- The carrying amount of intangible assets with an indefinite life, and the reasons supporting an assessment of an indefinite life;
- A reconciliation of the opening and ending balance of their carrying amount and accumulated amortization and impairment losses, separately identifying each reason for an increase or decrease; and
- Impairment losses and reversals of impairment losses and where they are reported in the statement of comprehensive income.
The goal of these disclosures for publicly accountable entities is basically to allow readers to understand the significance of intangibles and goodwill to the operations of the business.
Difficulty: Easy
Learning Objective: Identify the types of disclosure requirements for intangible assets and goodwill and explain the issues in analyzing these assets.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
*Ex. 12-110 Calculation of goodwill
Great Corporation is interested in purchasing Big World Company Ltd. The total of Big World’s net income amounts over the past five years is $745,000. During one of those years, Big World reported a gain on discontinued operations of $93,000. The fair value of Big World’s net identifiable assets is $684,000. A normal rate of return is 14%, and Great Corporation wants to capitalize excess earnings at 19%.
Instructions
Calculate the estimated value of goodwill.
*Solution 12-110
Average earnings [($745,000 − $93,000) × 1/5] | $ | 130,400 |
Normal earnings ($684,000 × 14%) |
| (95,760 |
Excess earnings |
| 34,640 |
Capitalization rate | ÷ | 19% |
Estimated goodwill | $ | 182,316 |
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 12-111 Calculation of goodwill
Saje Corporation’s pre-tax accounting income of $726,000 for the year 2023 included the following items:
Amortization of identifiable intangibles | $140,000 |
Depreciation of building | 119,000 |
Loss from discontinued operations | 46,000 |
Unusual, non-recurring gains | 157,000 |
Profit-sharing payments to employees | 69,300 |
Lush Industries Ltd. would like to purchase Saje Corporation. In trying to measure Saje’s normalized earnings for 2023, Lush determines that the building’s fair value is triple the book value and that its remaining economic life is double the life that Saje is using. Lush would continue the profit-sharing payments to employees, with the payments being based on income from continuing operations before amortization and depreciation.
Instructions
Calculate the 2023 normalized earnings amount of Saje Corporation that Lush would use to calculate goodwill.
*Solution 12-111
Pre-tax accounting income | $726,000 | ||||
Add: | Loss from discontinued operations | 46,000 | |||
772,000 | |||||
Deduct: | Additional depreciation based on fair value and extended life | $59,500 | * | ||
Unusual, non-recurring gains | 157,000 | 216,500 | |||
Normalized earnings | $555,500 | ||||
* | Adjusted depreciation for year on building $119,000 × 3 × 1/2 (remaining life doubled) | $178,500 | |
Less: Depreciation per year based on book value and original life | 119,000 | ||
Increase in annual depreciation | $59,500 |
The amortization of identifiable intangibles and the profit-sharing payments to the employees are not part of the income adjustment because they are recurring expenses.
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 12-112 Calculation of goodwill
Waikiki Corp. expects excess earnings of $48,000 for each of the next eight years. Assume half of the excess is earned at the end of each six months. Calculate the estimated goodwill if it is based on the present value of excess earnings discounted at 10%, compounded semi-annually.
*Solution 12-112
Present value of $24,000 for 16 periods at 5%; 10.83777 × $24,000 = $260,106.
OR 16 N, 5 I/Y, 24000 PMT, CPT PV = $260,106
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 12-113 Goodwill calculation
The net assets of Ohana Ltd., excluding goodwill, have a total fair value of $4 million, and earnings for the past five years total $2.2 million. Included in the latter figure are non-recurring gains and losses of $200,000 and $140,000 respectively, as well as sales commissions of $25,000. A 10% return on identifiable net assets is considered normal for the industry and annual excess earnings are to be capitalized at 16% in arriving at goodwill in developing a sales price for the business.
Instructions
Calculate the company's goodwill. Label all calculations.
*Solution 12-113
Goodwill is $175,000.
Earnings for 5 years $2,200,000
Less non-recurring gains 200,000
2,000,000
Add non-recurring losses 140,000
Adjusted 5-year total earnings $2,140,000
Average earnings ($2,140,000 ÷ 5) $428,000
Normal earnings ($4,000,000 ÷ 10) 400,000
Excess annual earnings $ 28,000
Excess earnings capitalized at 16% ($28,000 ÷.16) $175,000
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 12-114 Calculation of goodwill
The owners of Amazon Corp. are planning to sell the business. The cumulative earnings for the past five years are $600,000 including non-recurring losses of $100,000. The annual earnings based on an average rate of return for this industry would be $80,000. If excess earnings are to be capitalized at 12%, what is the implied goodwill?
*Solution 12-114
($600,000 + $100,000) ÷ 5 = $140,000
Average earnings $140,000
Normal earnings 80,000
Excess earnings $ 60,000
Goodwill ($60,000 ÷ 12) $500,000
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
PROBLEMS
Pr. 12-115 Intangible assets
The following transactions involving intangible assets of Falkland Corporation occurred on or near December 31, 2023. Complete the chart below by preparing the journal entry(ies) needed at that date to record the transaction, and at December 31, 2024 to record any resultant amortization. If no entry is required at a particular date, write "None needed."
On Date On
of Transaction December 31, 2024
1. Falkland paid Jericho Company $200,000 for the exclusive right to market a particular product, using the Jericho name and logo in promotional material. The franchise runs for as long as Falkland is in business. Falkland decided to amortize the franchise over 25 years.
2. Falkland spent $300,000 developing a new manufacturing process and has applied for a patent. It believes that its application will be successful and that the process will be successfully implemented and used for 10 years.
3. In January, 2024, Falkland's application for a patent (#2 above) was granted. Legal and registration costs incurred were $35,000. The patent runs for 17 years from the grant date. The manufacturing process will be useful to Falkland for 10 years.
4. Falkland incurred $90,000 in successfully defending another of its patents in an infringement suit. The patent expires during December 2027.
5. Falkland incurred $200,000 in an unsuccessful patent defence. As a result of the adverse verdict, the patent, with a remaining unamortized cost of $99,000, is deemed worthless.
6. Falkland paid Mexico Laboratories $52,000 for research work performed by Mexico under contract for Falkland.
Solution 12-115
On Date of Transaction On December 31, 2024
1. Franchises 200,000 1. Amortization Expense
Cash 200,000 —Franchises 8,000
Acc. Amortization
—Franchises 8,000
2. Deferred 2. Development Costs
Development Costs 300,000 Amortization
Cash 300,000 Expense 30,000
Deferred
Development
Costs 30,000
3. Patents 35,000 3. Amortization
Cash 35,000 Expense—Patents 3,500
Accumulated
Amortization
—Patents 3,500
4. Patents 90,000 4. Amortization Expense
Cash 90,000 —Patents 22,500
Accumulated
Amortization
—Patents 22,500
5. Legal Expense 200,000 5. None needed.
Cash 200,000
Loss on Impairment—
Patents 99,000
Accumulated
impairment
losses
—Patents 99,000
6. Research Expense 52,000 6. None needed.
Cash 52,000
Difficulty: Medium
Learning Objective: Identify and apply the recognition and measurement requirements for purchased intangible assets.
Section Reference: Recognition and Measurement of Intangible Assets
Learning Objective: Identify and apply the recognition and measurement requirements for internally developed intangible assets.
Section Reference: Recognition and Measurement of Internally Developed Intangible Assets
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement after Acquisition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 12-116 Journal entries for impairment of intangible assets
Patagonia Corp., a large, privately held company, is preparing its year-end entries. As senior accountant, you have been asked to prepare the entries related to the company's intangible assets.
Patagonia currently carries the following intangible assets* on its balance sheet:
Trade name $125,000 net of accumulated amortization of $75,000
Patent $126,000 net of accumulated amortization of $54,000
Other intangibles $340,000 no amortization recorded
Trademark $120,000 net of accumulated amortization of $30,000
$711,000
*Current year amortization has already been recorded.
The following additional information is available:
After recent negative press releases relating to the technology that underlies the patent, the company has carried out a recoverability test that indicates that the patent's carrying value is higher than its undiscounted future net cash flows. The patent's fair value has now been estimated at $84,000.
The item classified as “Other intangibles” relates to research costs that the company incurred in the current year. According to a statement from the company's President, "The costs were incurred with the intention to gain new knowledge. At the moment we don't know exactly how to use this information, but we are confident that eventually we will be able to use it."
Instructions
Critical Thinking: The controller is concerned about the President’s statement regarding the “other intangibles” account. Why is the controller concerned? Based on the information provided, prepare all journal entries that are required to adjust Patagonia's records as would be required under ASPE.
Solution 12-116
The controller is concerned because the company has not met the necessary criteria to capitalize all of the costs captured in the “other intangibles” category. According to the information provided, these costs appear to be research costs rather than development costs (that might qualify for capitalization). Research costs, by definition, do not meet the criteria that are required to recognize these costs as an asset. As a result, they should be expensed.
To record impairment loss on patent:
Loss on Impairment 42,000
Accumulated Impairment Losses—Patents 42,000
$126,000 – $84,000 = $42,000
To expense research costs that had been incorrectly capitalized:
Research and Development Expense 340,000
Other Intangible Assets 340,000
Difficulty: Medium
Learning Objective: Explain how intangible assets are accounted for after initial recognition.
Section Reference: Recognition and Measurement of Intangible Assets after Acquisition
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 12-117 Cost recovery impairment model
Green Air Inc. purchased a non-renewable licensing agreement for access to proprietary technology that allows it to produce bio-char from organic waste. When the 10-year licensing agreement was purchased 6 years ago there were no other companies operating in the space. However, numerous competitors have emerged in the industry as direct competitors to Green Air Inc. As a result of recent market entrants, the market demand for its bio-char products has been steadily declining. The company has the following information available related to the licensing agreement:
Licensing agreement at Cost $125,000
Estimated Useful Life 10 years
Salvage Value $ 0
Green Air Inc. is currently testing this asset for impairment. While the licensing agreement could currently be sold for $40,000, Green Air Inc. plans to keep producing the bio-char two more years. It expects net cash flows from production to be $20,000 yearly and that it can sell the licensing agreement for $7,500 at the end of year two. The current interest rate is 5%.
Instructions
- Assume that Green Air Inc. follows ASPE and uses the cost recovery impairment model. Is there an impairment loss? Explain why or why not?
- What is the value of the impairment loss?
Solution 12-117
- Recoverability Test
Carrying amount of the licensing agreement* $50,000
Recoverable amount** 47,500
The asset is impaired 2,500
*$125,000 – ($125,000 ÷ 10-year x 6) = $50,000
**Undiscounted future cash flows: $20,000 x 2 + $7,500 = $47,500
Under the cost recovery model, the carrying value of the assets is compared to the undiscounted cash flows expected from the later use and subsequent disposal of the asset group. The undiscounted cash flows are expected to be $47,500 which is lower than the current carrying value of the asset at $50,000. Therefore, there is an impairment loss. The impairment loss is calculated by subtracting the fair value of the discounted cash flows from the asset’s carrying value, which in this case is $43,991.
- Impairment loss: $50,000 – $43,991 = $6,009
**PV of Total Cash Flows: $43,991 =$37,188 + $6,803
PV of cash flows: N 2, PMT –$20,000, I/Y 5%, FV 0 = $37,188
PV of lump sum: N 2, I/Y 5%, FV –$7,500 = $6,803
Difficulty: Medium
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 12-118 Rational entity impairment model
Green Air Inc. purchased a non-renewable licensing agreement for access to proprietary technology that allows it to produce bio-char from organic waste. When the 10-year licensing agreement was purchased 6 years ago there were no other companies operating in the space. However, numerous competitors have emerged in the industry as direct competitors to Green Air Inc. As a result of recent market entrants, the market demand for its bio-char products has been steadily declining. The company has the following information available related to the licensing agreement:
Licensing agreement at Cost $125,000
Estimated Useful Life 10 years
Residual Value $ 0
Green Air Inc. is currently testing this asset for impairment. While the licensing agreement could currently be sold for $40,000, Green Air Inc. plans to keep producing the bio-char two more years. It expects net cash flows from production to be $20,000 yearly and that it can sell the licensing agreement for $7,500 at the end of year two. The current interest rate is 5%.
Instructions
Assume that Green Air Inc. follows IFRS and uses the rational entity model. Is there an impairment loss? Provide any related or required journal entry. Round your answers to the nearest dollar.
Solution 12-118
Carrying amount of the licensing agreement* $50,000
Recoverable amount** $43,991
Impairment loss $ 6,009
Journal Entry to record the impairment loss:
Loss on impairment 6,009
Accumulated impairment losses—licences 6,009
*$125,000 – ($125,000 ÷ 10-year x 6) = $50,000
**PV of Total Cash Flows: $43,991 =$37,188 + $6,803
PV of cash flows: N 2, PMT –$20,000, I/Y 5%, FV 0 = $37,188
PV of lump sum: N 2, I/Y 5%, FV –$7,500 = $6,803
Difficulty: Medium
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 12-119 Impairment of indefinite life intangibles
Spicy Sausages Inc. is a publicly traded company that specializes in the production of a variety of European style sausages and speciality lunch meats in Western Canada. The company has been operational for nearly 100 years and has a loyal customer base. The company recently needed to recall 50% of its specialty lunch meats due to a listeria outbreak in its largest production facility. Management is quite concerned that this has damaged Spicy Sausage’s reputation and impaired its brand. The following information has been compiled regarding future values specifically related to the company’s brand:
Other Intangibles (brand): $3,485,000
Undiscounted cash flows: $3,750,000
Discounted cash flows: $3,450,000
Instructions
Critical Thinking: Is Spicy Sausage’s brand impaired? Explain why or why not. If the brand is impaired what is the value of the impairment, how would the impairment be treated and what model would be used to calculate the impairment? For a company using IFRS is there any difference in calculating the impairment between limited-life and indefinite-life intangibles? If there is, provide a detailed explanation of the two and compare and contrast the methods.
Solution 12-119
Spicy Sausage Inc. is a publicly traded company using IFRS. Therefore, indefinite-life intangibles such as brand need to be tested for impairment when there is a change in events or circumstances that might affect impairment, such as the listeria outbreak at Spicy Sausage Ltd. The test applied is the fair value test, which compares the carrying amount of the asset directly with the asset’s fair value or discounted cash flows. In this case the carrying value of the brand is $3,485,000 and the fair value is $3,450,000 for an impairment value of $35,000. The $35,000 can be accounted for by directly crediting the Intangible asset (Brand) account or alternatively setting up an Accumulated Impairment Losses—Intangibles assets (Brand) account.
Under IFRS, limited-life intangibles must be treated for impairment at the end of every reporting period as opposed to only when an event or circumstance may have impaired the asset. While the fair value model is used for indefinite-life intangibles, limited-life intangibles would be tested using the rational entity model.
Under the rational entry model, a recoverable amount is estimated if there are any indications of impairment. The recoverable amount is compared to the carrying amount of the asset, which is similar to the fair value method that compares the fair value to the carrying value. In the event that the carrying amount is greater than the recoverable amount (or fair value) an impairment loss will be recorded. However, the only option to record the impairment loss under the rational entity model is for it to be recorded under accumulated impairment losses.
Difficulty: Hard
Learning Objective: Explain and account for impairment of limited-life and indefinite-life intangible assets.
Section Reference: Impairment and Derecognition
CPA: Financial Reporting
Bloomcode: Evaluation
AACSB: Analytic
Pr. 12-120 Calculation of and journal entries for impairment of goodwill
Gandaph Corporation purchased a division five years ago for $3 million. The division has been identified as a reporting unit that is cash-generating under IFRS. Management is reviewing the division for impairment of goodwill and has estimated the fair value of the reporting unit to be $3.2 million and the unit’s value in use to be $3.3 million. In addition, there would be $75,000 in direct costs should the company decide to sell. The carrying amounts of the division’s net assets, including the associated goodwill of $1,350,000, are listed below:
Carrying Amount of Net Assets Including Goodwill
Cash | $ 300,000 |
Receivables | 450,000 |
Inventory | 1,050,000 |
Property, plant, and equipment (net) | 1,200,000 |
Goodwill | 1,350,000 |
Less: Accounts and notes payable | (750,000) |
Net assets, at carrying amounts | $3,600,000 |
Instructions
Determine if goodwill is impaired and provide the related journal entries, if any, under both ASPE and IFRS.
Solution 12-120
Under ASPE, a loss on impairment of $400,000 is indicated as follows:
Carrying amount of unit, including goodwill | $3,600,000 |
Fair value of unit | 3,200,000 |
Goodwill—loss on impairment | $ 400,000 |
Under IFRS, a loss on impairment of $300,000 is indicated:
Carrying amount of unit, including goodwill | $3,600,000 | |
Recoverable amount of unit: higher of | ||
Value in use and Fair value less costs to sell | 3,300,000 3,125,000 | |
(3,300,000) | ||
Goodwill—loss on impairment | $ 300,000 |
Under ASPE
Loss on Impairment 400,000
Accumulated Impairment Losses—Goodwill 400,000
Under IFRS
Loss on Impairment 300,000
Accumulated Impairment Losses—Goodwill 300,000
Difficulty: Medium
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Goodwill—Impairment
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 12-121 Determining goodwill impairment – ASPE and IFRS
Gandaph Corporation purchased a division five years ago for $3 million. The division has been identified as a reporting unit that is cash-generating under IFRS. Management is reviewing the division for impairment of goodwill and has estimated the fair value of the reporting unit to be $3.8 million and the unit’s value in use to be $3.9 million. In addition, there would be $75,000 in direct costs should the company decide to sell. The carrying amounts of the division’s net assets, including the associated goodwill of $1,350,000, are listed below:
Carrying Amount of Net Assets Including Goodwill
Cash | $ 300,000 |
Receivables | 450,000 |
Inventory | 1,050,000 |
Property, plant, and equipment (net) | 1,200,000 |
Goodwill | 1,350,000 |
Less: Accounts and notes payable | (750,000) |
Net assets, at carrying amounts | $3,600,000 |
Instructions
Would goodwill be considered impaired under ASPE? Would your answer change under IFRS?
Solution 12-121
Under ASPE, the goodwill is not impaired. The asset group’s $3.6-million carrying value is less than its fair value of $3.8 million. Under IFRS, goodwill is not considered impaired either. The recoverable amount of the unit is $3.9 million—the higher of its value in use ($3.9 million) and its fair value less costs to sell ($3,800,000 − $75,000)—and this exceeds the unit’s carrying amount of $3.6 million.
Difficulty: Medium
Learning Objective: Explain and account for impairment of goodwill.
Section Reference: Impairment of Goodwill
Learning Objective: Identify differences in accounting between IFRS and ASPE.
Section Reference: IFRS/ASPE Comparison
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication
*Pr.12-122 Excess earnings approach to calculating goodwill
Totally Tech Limited was recently sold to Apps R Us, another larger tech company in the same industry. Totally Tech’s normalized expected annual future earnings are estimated to be $250,000, with the fair value of its net identifiable assets at $975,000. The average industry ROI is 18%.
Instructions
What is the estimated value of the goodwill using the excess earnings approach assuming an appropriate discount rate of 20% for calculating goodwill?
Critical Thinking: What effect would a changing discount period have on the purchase price of Totally Tech, if any? Should a different discount period be used? Explain your answer.
*Solution 12-122
Fair Value of Totally Tech’s identifiable net assets: $975,000
Industry average rate of return: 18%
Normal / Industry-level earnings 175,500
Totally Tech’s expected future earnings 250,000
Less: Industry level earnings 175,500
Excess annual earnings $ 74,500
Assuming a capitalization rate of 20%, the goodwill generated through the sale/purchase of Totally Tech would be calculated by using the value of the excess annual earnings divided by the capitalization rate. This would have a value of $372,500. ($74,500 / 20%)
This calculation above assumes that these excess earnings will last in perpetuity or indefinitely. However, this is unlikely. Choosing a discount period, assuming the same discount rate, would result in a reduced value of the implied goodwill. Generally, earnings are not expected to last indefinitely, but rather for a set period or number of years. Therefore, it is more likely that a finite discount period approach would be applied to earnings in calculating goodwill.
Difficulty: Hard
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Evaluation
AACSB: Analytic
*Pr.12-123 Total earnings approach to calculating goodwill
Totally Tech Limited was recently sold to Apps R Us, another larger tech company in the same industry. Totally Tech’s normalized expected annual future earnings are estimated to be $250,000, with the fair value of its net identifiable assets at $975,000. The average industry ROI is 18%.
Instructions
What is the estimated value of the goodwill using the total earnings approach assuming an appropriate discount rate of 20% for calculating goodwill?
*Solution 12-123
Fair Value of Totally Tech’s identifiable net assets: $ 975,000
Industry average rate of return: 18%
Industry level earnings $ 175,500
Fair Value of the company: $250,000 ÷ 20% $1,250,000
Less: Fair Value of the identifiable net assets: $175,500 ÷ 20% $ 877,500
Goodwill $ 372,500
Difficulty: Medium
Learning Objective: Explain and apply basic approaches to valuing goodwill.
Section Reference: Valuing Goodwill (Appendix 12A)
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
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Intermediate Accounting v1 13e | Canada | Test Bank
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