- A company's records show the following items and amounts: Internally-generated goodwill ($200,000), Costs of training employees on a new system ($50,000), Patent purchased from an inventor ($150,000), and Research and development costs ($100,000). What is the total amount that should be reported as intangible assets on the company's year-end balance sheet?
Answer: $150,000
Only externally acquired intangible assets are recognized on the balance sheet. Internally-generated goodwill cannot be capitalized. Employee training costs and research and development costs are expensed as incurred under U.S. GAAP. The only item from the list that qualifies as a capitalized intangible asset is the purchased patent for $150,000.
- A company's balance sheet includes the following items in its 'Other Assets' section: (1) a three-year license to use specific patented technology, acquired for $90,000; (2) prepaid property taxes for the next 18 months of $36,000; and (3) bond issue costs of $50,000, related to bonds payable with a 10-year term. Which of these items should be classified and accounted for as an intangible asset subject to amortization?
Answer: The technology license only.
The technology license represents a contractual right to use an asset and is a classic intangible asset, which should be amortized over its three-year life. Prepaid property taxes are a prepaid expense, not an intangible asset. Under current U.S. GAAP, bond issue costs are no longer treated as an asset; they are presented as a direct reduction from the carrying amount of the related debt (a contra-liability) and are amortized to interest expense over the life of the bond.
- On January 1, Year 1, a company held a patent with a carrying amount of $180,000 and a remaining useful life of 6 years. In July of Year 1, the company incurred legal fees of $45,000 in a successful defense of the patent. The company determined that the successful defense did not extend the patent's original useful life. What is the patent amortization expense for the year ended December 31, Year 1?
Answer: $37,500
Legal fees for a successful defense of a patent are capitalized, meaning they are added to the patent's carrying amount. The new carrying amount is then amortized over the remaining useful life. New carrying amount = $180,000 (old carrying amount) + $45,000 (legal fees) = $225,000. This new amount is amortized over the remaining useful life of 6 years. Annual amortization expense = $225,000 / 6 years = $37,500.
- A company acquires a patent for $100,000 that has a 10-year useful life. At the end of the second year, the company unsuccessfully defends the patent in an infringement lawsuit, incurring $30,000 in legal fees. The loss of the lawsuit renders the patent worthless. What is the total loss related to the patent that the company should recognize in the second year?
Answer: $110,000
The loss in the second year has two components. First, the legal fees for an unsuccessful defense are expensed immediately as a loss ($30,000). Second, since the patent is now worthless, its remaining carrying amount must be written off. The carrying amount at the end of the second year is $100,000 - (2 × $10,000 annual amortization) = $80,000. This entire carrying amount must be written off as a loss. The total loss for Year 2 is: $30,000 (legal fees) + $80,000 (asset write-off) = $110,000.
- On January 1, Year 1, Parent Co. acquired Subsidiary Co. in a business combination that resulted in the recognition of $500,000 of goodwill. Also during Year 1, Parent Co. purchased a trademark for $120,000, which is expected to be renewed indefinitely. Finally, Parent Co. acquired a patent for $240,000 with a 10-year useful life on January 1. Assuming no impairments, what is the total amortization expense Parent Co. should report for these assets in its Year 1 income statement?
Answer: $24,000
Intangible assets with indefinite lives are not amortized; instead, they are tested for impairment annually. Both goodwill and the trademark with an indefinite renewal period fall into this category. Therefore, no amortization expense is recorded for them. The only asset subject to amortization is the patent, which has a finite useful life. The annual amortization for the patent is its cost divided by its useful life: $240,000 / 10 years = $24,000. This is the total amortization expense for the year.
- On January 1, a company paid an initial fee of $400,000 for a 10-year franchise. The franchise agreement also requires an annual contingent payment equal to 2% of the franchisee's annual revenue. For the first year, the company's revenue was $1,500,000. What is the total franchise-related expense for the first year?
Answer: $70,000
The total expense has two components. First, the initial franchise fee is capitalized and amortized over its 10-year life. Annual amortization expense = $400,000 / 10 = $40,000. Second, the contingent payment is an operating expense of the period. Contingent payment expense = 2% * $1,500,000 = $30,000. The total franchise-related expense for the year is the sum of these two amounts: $40,000 + $30,000 = $70,000.
- Which of the following journal entries correctly records the annual amortization of a patent, assuming the company uses an accumulated amortization account?
Answer: Debit Amortization Expense; Credit Accumulated Amortization
The journal entry to record amortization expense increases (debits) the Amortization Expense account, which is reported on the income statement. It also increases (credits) the Accumulated Amortization account, which is a contra-asset account that reduces the carrying amount of the intangible asset on the balance sheet. Amortization is a non-cash expense, so cash is not affected.
- On December 31, Year 1, a company determined that one of its patents was impaired. The patent had an original cost of $500,000 and accumulated amortization of $200,000. Its fair value was determined to be $150,000, and it had a remaining useful life of 5 years. After recognizing the impairment loss, what is the amortization expense for the patent for Year 2?
Answer: $30,000
First, determine the carrying amount before impairment: $500,000 (cost) - $200,000 (acc. amort.) = $300,000. An impairment loss is recognized for the excess of the carrying amount over the fair value: $300,000 - $150,000 = $150,000 loss. After impairment, the patent's new carrying amount is its fair value of $150,000. This new carrying amount becomes the basis for future amortization. The amortization for Year 2 is this new basis divided by the remaining useful life: $150,000 / 5 years = $30,000.
- Vortex Corp. purchased several assets from a competitor for a lump-sum price of $1,000,000. The fair values of the assets acquired were as follows: land for $300,000, a building for $600,000, and a customer list for $300,000. The customer list is expected to have a useful life of 5 years. What is the amortization expense for the customer list for the first full year?
Answer: $50,000
In a basket purchase, the total cost must be allocated to the individual assets based on their relative fair values. Total fair value = $300,000 + $600,000 + $300,000 = $1,200,000. Customer list allocation = ($300,000 ÷ $1,200,000) × $1,000,000 = $250,000. Annual amortization = $250,000 ÷ 5 years = $50,000.
- A company spent $1,000,000 on a highly successful advertising campaign, which significantly increased the public recognition and value of its primary brand name. The company also spent $300,000 on an employee training program that created a uniquely skilled workforce. What amount should be recognized as intangible assets on the balance sheet as a direct result of these expenditures?
Answer: $0
Costs of developing, maintaining, or restoring intangible assets that are not specifically identifiable, have indeterminate lives, or are inherent in a developing business as a whole should be expensed as incurred. This includes costs for internally developed brand names, advertising, and employee training. Therefore, neither the advertising campaign nor the training program costs can be capitalized as intangible assets.
- Innovate Solutions purchased a franchise agreement for $150,000 on April 1, 2022. The franchise has a legal life of 15 years, but Innovate expects to renew it indefinitely as long as certain performance criteria are met. At December 31, 2023, Innovate is not meeting the renewal criteria and estimates only a 60% probability of qualifying for renewal. How should Innovate account for this franchise in its 2023 financial statements?
Answer: Reclassify as finite-life and record catch-up amortization
When renewal is no longer probable (60% is less than 'more likely than not'), the asset should be reclassified from indefinite-life to finite-life. Since the circumstances changed, catch-up amortization should be recorded. From April 1, 2022 to December 31, 2023 = 21 months. Annual amortization = $150,000 ÷ 15 years = $10,000. Total catch-up = $10,000 × 1.75 years = $17,500. Choice A ignores the change in renewal probability. Choice B doesn't address the prior period treatment. Choice C assumes impairment without evidence of fair value decline.
- Apex Software is developing a new logistics application. During the year, it incurred the following costs: $150,000 in research and planning before technological feasibility was established; $200,000 for coding and testing after technological feasibility was established but before the product master was completed; and $50,000 for producing product masters for training materials. What amount should Apex capitalize as a software development intangible asset?
Answer: $200,000
Under U.S. GAAP, software development costs are expensed as R&D until technological feasibility is established. Costs incurred after technological feasibility but before the product is available for general release are capitalized. The costs of producing product masters for training materials are expensed as incurred. Therefore, only the $200,000 for coding and testing after technological feasibility should be capitalized. The $150,000 is R&D expense, and the $50,000 for training materials is another expense.
- In its first year, a new corporation incurred $15,000 in legal fees for drafting the corporate charter and bylaws, $5,000 in fees paid to the state for incorporation, and $20,000 for the costs of a market study conducted before operations began. What total amount should the corporation capitalize as an intangible asset from these activities?
Answer: $0
Under U.S. GAAP, organizational costs and start-up costs must be expensed as they are incurred. This includes costs such as legal fees for incorporation, state filing fees, and costs of initial business planning and market studies. None of these costs can be capitalized as an intangible asset. Therefore, the amount to be capitalized is $0.
- On January 1, Year 1, Omni Corp. purchased a patent for $360,000. The patent had a remaining legal life of 15 years, but Omni estimated its useful life would only be 10 years. On January 1, Year 3, Omni determined that a competitor's new product would shorten the patent's remaining useful life to only 4 more years (i.e., ending December 31, Year 6). What is the amortization expense for the patent that Omni should record for the year ended December 31, Year 3?
Answer: $72,000
This is a multi-step problem involving a change in accounting estimate. First, calculate the amortization for the first two years. Amortization is over the shorter of legal or useful life (10 years). Annual amortization = $360,000 / 10 = $36,000. After 2 years (Year 1 and Year 2), accumulated amortization is $36,000 × 2 = $72,000. The carrying amount at the start of Year 3 is $360,000 - $72,000 = $288,000. This carrying amount is then amortized over the new remaining useful life of 4 years. Amortization for Year 3 = $288,000 / 4 = $72,000.
- As part of a business acquisition, a company paid a key executive of the acquired firm $150,000 for a covenant not to compete for a period of 5 years. The payment was made on January 1, Year 1. What is the carrying amount of the non-compete agreement on the company's balance sheet as of December 31, Year 2?
Answer: $90,000
The payment for the non-compete agreement is capitalized as an intangible asset and amortized over its contractual life of 5 years. Annual amortization expense = $150,000 / 5 years = $30,000. After two full years (Year 1 and Year 2), the accumulated amortization is $30,000 × 2 = $60,000. The carrying amount is the original cost less accumulated amortization: $150,000 - $60,000 = $90,000.
- What amount should MediCore capitalize as software costs, and what is the amortization expense for 2023?
Answer: Capitalize $150,000; amortization expense $7,500
For internal-use software, capitalize application development costs ($120,000) and data conversion costs ($30,000) = $150,000 total. Preliminary project costs ($25,000), training ($15,000), and maintenance ($10,000) are expensed. Amortization begins when software is placed in service (Oct 1). 2023 amortization = $150,000 ÷ 5 years × 3/12 months = $30,000 × 0.25 = $7,500. Choice B omits data conversion costs and miscalculates amortization. Choice C uses full year amortization instead of partial year. Choice D incorrectly capitalizes training costs.
- A company reported net income of $500,000 for the year. The company also recorded $60,000 of amortization expense on its patents. There were no other non-cash expenses or gains/losses, and all sales and operating expenses were cash transactions. In preparing the statement of cash flows using the indirect method, what is the net cash provided by operating activities?
Answer: $560,000
In the indirect method statement of cash flows, we start with net income and adjust for non-cash items. Amortization is a non-cash expense that reduces net income but does not affect cash. To reconcile net income to net cash flow from operating activities, we must add back the amortization expense. Therefore, Net Cash from Operating Activities = Net Income + Amortization Expense = $500,000 + $60,000 = $560,000.
- A company acquired a customer list for $240,000. The company expects to benefit from the list over 4 years. Due to expected customer attrition, the pattern of benefits is estimated to be 40% in Year 1, 30% in Year 2, 20% in Year 3, and 10% in Year 4. If the company's amortization policy is to reflect the pattern of economic benefits, what is the carrying amount of the customer list at the end of Year 2?
Answer: $72,000
The amortization should match the pattern of economic benefits. Amortization for Year 1 = 40% of $240,000 = $96,000. Amortization for Year 2 = 30% of $240,000 = $72,000. Total accumulated amortization at the end of Year 2 = $96,000 + $72,000 = $168,000. The carrying amount is the original cost less accumulated amortization: $240,000 - $168,000 = $72,000.
- On January 1, Zenith Inc. acquired a franchise from a national chain. The agreement required an initial payment of $500,000 and annual payments of $20,000 for general services provided by the franchisor. Zenith also paid $30,000 in legal fees related to the acquisition of the franchise rights. The franchise has a useful life of 10 years. What is the total amount of expense related to the franchise that Zenith should report on its income statement for the first year?
Answer: $73,000
The capitalized cost of the franchise includes the initial payment and directly attributable costs, like legal fees. Capitalized cost = $500,000 (initial fee) + $30,000 (legal fees) = $530,000. This amount is amortized over the useful life of 10 years. Annual amortization expense = $530,000 / 10 = $53,000. The annual payment of $20,000 is an ongoing operational expense, not a capitalizable cost. Therefore, total expense for the first year is the amortization expense plus the operational expense: $53,000 + $20,000 = $73,000.
- A company holds a patent accounted for under U.S. GAAP with a carrying amount of $200,000. During the year, due to its market dominance, an independent appraiser determines the patent's fair value is now $500,000. How should the company account for this increase in value?
Answer: Disclose the increase in fair value in the notes to the financial statements but make no journal entry.
Under U.S. GAAP, intangible assets are accounted for using the cost model. Revaluation to fair value is not permitted for intangible assets (unlike under IFRS, which allows it for certain assets). Therefore, no journal entry is made to increase the asset's carrying amount. However, if the fair value information is considered relevant, it may be disclosed in the footnotes to the financial statements, but the asset itself remains at its amortized cost on the balance sheet.
