Question & Answer

On September 1, 2014, Winans Corporation acquired Aumont Enterprises for a cash payment of $700,000. At the time of purchase, Aumont’s balance sheet showed assets of $620,000, liabilities of $200,000, and owners’ equity of $420,000. The fair value of Aumont’s assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.

Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of

$120,000 on April 1, 2014. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin’s April 1 journal entry and December 31 adjusting entry.

Larry Byrd, Inc., spent $68,000 in attorney fees while developing the trade name of its new product, the Mean Bean Machine. Prepare the journal entries to record the $68,000 expenditure and the first year’s amortization, using an 8-year life.

Use the information provided in BE12-1. Assume that at January 1, 2016, the carrying amount of the patent on Celine Dion’s books is $43,200. In January, Celine Dion spends $24,000 successfully defending a patent suit. Celine Dion still feels the patent will be useful until the end of 2023. Prepare the journal entries to record the $24,000 expenditure and 2016 amortization.

Celine Dion Corporation purchases a patent from Salmon Company on January 1, 2014, for $54,000.

The patent has a remaining legal life of 16 years. Celine Dion feels the patent will be useful for 10 years.

Prepare Celine Dion’s journal entries to record the purchase of the patent and 2014 amortization.

An intangible asset with an estimated useful life of 30 years was acquired on January 1, 2004, for $540,000. On January 1, 2014, a review was made of intangible assets and their expected service lives, and it was determined that this asset had an estimated useful life of 30 more years from the date of the review. What is the amount of amortization for this intangible in 2014?

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?

In 2013, Austin Powers Corporation developed a new product that will be marketed in 2014. In connection with the development of this product, the following costs were incurred in 2013: research and development costs $400,000; materials and supplies consumed $60,000; and compensation paid to research consultants $125,000. It is anticipated that these costs will be recovered in 2016.

What is the amount of research and development costs that Austin Powers should record in 2013 as a charge to expense?

Indicate the proper accounting for the following items.

(a) Organization costs. (c) Operating losses.

(b) Advertising costs.

Which of the following activities should be expensed currently as R&D costs?

(a) Testing in search for or evaluation of product or process alternatives.

(b) Engineering follow-through in an early phase of commercial production.

(c) Legal work in connection with patent applications or litigation, and the sale or licensing of patents.

Research and development activities may include (a) personnel costs, (b) materials and equipment costs, and (c) indirect costs. What is the recommended accounting treatment for these three types of R&D costs?

What is the nature of research and development costs?

Simon Company determines that its goodwill is impaired. It finds that its implied goodwill is $360,000 and its recorded goodwill is $400,000. The fair value of its identifiable assets is $1,450,000. What is the amount of goodwill impaired?

Explain how losses on impaired intangible assets should be reported in income.

Last year, Zeno Company recorded an impairment on an intangible asset held for use. Recent appraisals indicate that the asset has increased in value. Should Zeno record this recovery in value?

Braxton Inc. is considering the write-off of a limited-life intangible because of its lack of profitability. Explain to the management of Braxton how to determine whether a write-off is permitted.

In examining financial statements, financial analysts often write off goodwill immediately. Comment on this procedure.

Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in order to conform with generally accepted accounting principles?

What is goodwill? What is a bargain purchase?

Explain the difference between artistic-related intangible assets and contract-related intangible assets.

Izzy Inc. purchased a patent for $350,000 which has an estimated useful life of 10 years. Its pattern of use or consumption cannot be reliably determined. Prepare the entry to record the amortization of the patent in its first year of use.

McNabb Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented, all in the year 2014.

How should these costs be accounted for in 2014?

Columbia Sportswear Company acquired a trademark that is helpful in distinguishing one of its new products. The trademark is renewable every 10 years at minimal cost. All evidence indicates that this trademarked product will generate cash flows for an indefinite period of time.

How should this trademark be amortized?

What should be the pattern of amortization for a limitedlife intangible?

What are factors to be considered in estimating the useful alife of an intangible asset?