Chapter 12 Completed Notes

Chapter 12 Completed Notes - int LHA’PTL‘M I0 Mi, this...

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Unformatted text preview: int LHA’PTL‘M I0 Mi, this Tm,ch wean TerHlBL-E. MT; CHAPTER 12: INTANGIBLES 1. Describe the characteristics of intangible assets. intangible assets have two main characteristics: (1) They lack Ehysical existence, and (2) they are not financial instruments. In most cases, intangible assets provide servrces over a period 0 years. 3 a re u '."t ey are normally classified as long-term assets. Ekat’lfii‘. (pp‘mqms I Twumks, Pall-emu] gnaw. m, We M4 . / \, . can M. Nme ow we lumuxlw H ° ' qsnm'rsD-w Lenin—"7 2. Identify the costs to include in the initial valuation of intangible assets. Intangibles‘are recorded at cost. Cost includes all costs of ac uisition and ex enditures necessa to make the intangible asset ready for its intended use. if intan lbles are ac uired for stock or in exchan e for other assets. the cost of the intan ible is the fair market value of the consideration we: or the fair marEet value 0? the intan ible received. whichever is more cleari evident. When a company buys several intangibles, or a combination of intangibles and tangibles. in a " asket purchase. “ it should allocate the cost on the basis of fair market values. r, LIKE MMLLIMION imam. inlet-assets,flintan lbles. have...eithel'z.=.a-:« limited = " '- r-- - r l . - rfi""‘ar’iiés ariidi‘tiiéifitan 'ible'?'3'a's"‘5ets=1iliiitii"i‘a“'lilfiited life. They do not amortize intangible assets wit an indefinite life. Limited-life intangibles should be amortized by systematic charges to expense over their useful life. The useful life should reflect the period over which these assets will contribute to cash flows. The amount to report for amortization expense should reflect the pattern in which a company consumes or uses up the asset. if it can reliably determine that pattern. Otherwise the company should use a straight-line a roach. PP _ 4. 'List the types of intangible assets. Major types of intangibles are: (1) marketing-related intangibies, used in the marketing or promotion of products or sewiCes; (2) customer-referred intangibles, resulting from interactions with outside parties; (3) emetic—related infantibies, giving ownership rights to such items as plays and literary works; (4) contract-related intangibles, representing the vaiue of rights that arise from contractual arrangements; (5) technologyareiated intangible assets. relating to innovations or technological advances; and (6) goodwiii, arising from business combinations NWT—mw’ifi) \N'TR‘NthES: L-oi: TWMWS ULSIUMEh-LBLA’TCD INquws‘a-q: outsan on; Primate-ich tr 2 comiuqn‘lx CONTNH’T' MAME) n .- momswtl mwMt‘N‘r Phwle-W T50“ Not/WW ' NEW—D " °~ fiwas - qwbwiw: DNL‘[ swamp NHE‘M 8N6 MMFkNY .3 Puumrw) m we)an twenty __ Wt, |NW‘&NM«L‘1 sameness) lNTW‘allSWZL W 5 identify the conceptual issues related to research and development costs. R 8. D costs are not in themselves intangible assets. but research and development activities frequently result in the development of something a company patents or copyrights. The difficulties in accounting" for R D expenditures are: (1) identifying the costs associated with particular activities. projects. or achievements. and (2) at r inin the ma nitude of the future benefits and ten th of' time over xx which a company may realize such benefits. Because of these latter uncertaintiesl companies n are required to expense all research and development costs when incurred. (, Describe the accounting procedures for research and development costs and other similar I costs. The costs associated with R & D activities and the accounting treatment accorded them km are as follows: (1) Materials 9 ui merit and facilities: Ex ense the entire costs unless the items have alternative future uses in R & D activities or otherwise). than car materials as inven c an a ocate to ' & D exense as consue an caitaize emment and aci mas (and depreciate as used). (2 Personnel: Salaries. wa es. and other related costs 0 ersonnel en la ed in R & D should be ex ensed as incurred. (3) Purchased intangibles: Expense the LIKE entire cost unless the items have alternative future uses. t en ca ita ize an amo ma. (1) (4) contract services: The costs of Services performed by others in connection wi the reporting company's R & D should be expensed as incurred. (5) indirect costs: A reasonable allocation of indirect costs (except for general and administrative costs. which must be related to be included) are included in R & D costs and expensed. Many costs have characteristics similar to R s D costs. Examples are start-up costs. initial operating losses, and advertising costs. For the most part. these costs are expensed as incurred, similar to the accounting for R & D costs. we is w entrust? Explanation: To differentiate research and development costs from other similar costs. the FASB issued the following definitions in SFAS No. 2: Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technigue or in bringing about a significant improvement to an existing product or process. . .. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant im rovement to an e r process whether intended for sale .or use. plants. it does not inciude routine or periodic alterations to existing products. production lines. manufacturing processes. and other ongoing operations even though these alterations may represent improvements: it does not include market research or market testing activities. Many costs have characteristics similar to those of research and development costs. for instance. costs of relocation and rearrangement of facilities, start-up costs for a new plant or new retail outlet. marketing research costs, promotion costs of a new product or service, and costs of training new personnel. To distinguish between R & D and those other similar costs. the following schedule (from SFAS No. 2) provides (1) examples of activities that typically would be included in research and development. and (2) examples that typically would be excluded from research and development. R & D Activities Laboratory research aimed at discovery of new knowledge. Searching for applications of new research findings. Conceptual formulation and design of possible product or process alterna- tives. Testing in search for or evaluation of product or process alternatives. Modification of the design of a product or process. Design. construction. and testing of preproduction prototypes and models. Design of toolsI jigs. moldsI and dies involving rig)! technology. Design. construction, and operatiOn of a pilot plant not useful for commercial production. Engineering activity required to advance the design of a product to the manufacturing stage. (d) (e) {9)- (h) Activities Not Considered R & D Engineering follow-through in an early phase of commercial production. Quality control during commercial production including routine testing; Troubleshooting breakdowns during commercial production. Routine, on-going efforts to refine, enrich. or improve the qualities of an existing product. Adaptation of an existing capability to a particular requirement or customer's need. ' Periodic design changes to existing - products. Routine design of tools. iigs. molds, and dies. Wity, including design and construction engineering related to the construction, relocation, rearrange- ment. or startup of facilities or equipment. Legal work on patent applications, sale, licensing, or litigation. (LN-“c Purpose: (LO. 9) This case is designed to give you practice in differentiating expenditures ' which are classified as research and development costs and expenditures which are not included with R & D. instructions Various types of expenditures are listed below. indicate the accounting treatment appropriate for each type of expenditure listed. ' Type of Expenditure Accounting Treatment 1. ConstructiOn of long-range research facility for use in current and future projects (three story, 400.000-square— foot building). 2. Acquisition of R & D equipment for use on current project only. 3. Acquisition of machinery to be used on Current and future R 8:. 0 projects. 4. Purchase of materials to be used on current and future R & D projects. 5. Salaries of research staff designing new laser bone scanner. 6. Research costs incurred under contract with another corporation and billable to that company monthly. 7. Material. labor, and overhead costs of prototype laser scanner. 8. Costs of testing prototype and design t modifications. Legal fees to obtain patent on new laser scanner. Wye salaries. " fittefine t0 preregte;n.ew1aser Engineering costs incurred to advance the laser scanner to full production stage. Cost of successfully defending patent on laser scanner. Commissions to sales staff marketing new laser scanner. 95mm: weird. 54253 leMUC) To OGTA-lN A PamrN'r Ambjoic var-“em Pr Pmur - wncmm. Fumrrsep or, mrsrwn—wj 016Npr Is Wife—Lat?» lg mmfiw b “L M. renew» “rows tu—L: Purpose: (LO. 8. 9) This exercise will give you practice in identifying activities that ccnstitute R 8. D activities. i ‘ ' Listed below are Tour independent situations involving research and development costs: 1. During 2007 Bebe Co. incurred the following costs: Research and development services performed by Way Co. for Bebe $ 325,000“ Testing for evaluation of new products 300,000 \/ Laboratory research aimed at discovery of new knowledge 375,000 \/ Research and development services performed by Bebe for Elway Co. 220,000 KkP-I How much should Bebe report as research and development expense for the year ended December 31, 2007? 2. Holly Corp. incurred the following costs during the year ended December 31, 2007: Design, constructionr & testing of preproduction prototypes & models 33 220.000 / Routine. on-going efforts to refine, enrich. or otherwise improve on“! upon the qualities of an existing product _ 250,000 X Quality control during commercial production including routine Uh} testing of products 300,000X ' Laboratory research aimed at discovery of new knowledge 360,000“ Conceptual formulation and design of possible product alternatives 100,000 ‘/ What is the total amount to be classified and expensed as research and development for 2007? P r L‘E 3. Polanski Company incurred costs in 2007 as follows: Equipment acquired for use in various R & D projects 1‘ (current and future) ‘ $ 890,000 5* Depreciation on the equipment above - 135,000 ’ Materials used in R a D 300,000 J Compensation costs of personnel in R & D 400.000 ‘/ Qutsie-iconsulting,-.fees rope a. new 150,000 f iii-ire ~ -.costs'%53apprprla e y‘allc'a as to R050 - 280,000 What is the total amount of research and development expense that should be reported in Polanski's 2007 income statement? ' 4. Liverpool Inc. incurred the following costs during the year ended December 31, 2007: Laboratory research aimed at discovery of new knowledge $ 175,000 Va“ Routine design of tools, jigs, molds. and dies 60,0001 Radical modification to the formulation of a chemical product 125.000 9' Research and development costs reimbursable under a contract to perform R a D for Johnathon King, inc. 350.000 NV Testing for evaluation of new products 275,000 / What is the total amount to be classified and expensed as research and development for 2007? u: QW-3 Purpose: (LO. 2, 3) This exercise will review the accounting guidelines related to three types of intangible assets—patent, franchise. and trademark. Information concerning Linda Heckenmueiler Corporation's intangible assets follows: 1. Heckenmueller incurred $85,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2007. Legal fees and other costs associated with registration of the patent totaled $16,000. Heckenmueller estimates that the useful life of the patent will be 8 years; the legal life of the patent is 20 years. 2. On January 1, 2007, Heckenmueiler signed an agreement to operate as a franchisee of Cluck-Cluck Eried Chicken. inc. for an initial franchise fee of $117,400. The agreement provides that the fee is not refundable and no future services are required of the franchisor. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Heckenmuelier‘s revenue from the franchise for 2007 was $1,800,000. Heckenmueller estimates the useful life of the franchise to be 10 years. 3. A trademark was purchased from Wolfe Company for $64,000 on July 1. 2004. Expenditures for successful litigation in defense of the trademark totaling $16,000 were paid on July 1, 2007. Heckenmueller estimates that the trademark will have 10 7% or PE instructions (8) Prepare a schedu'" showing the intangible asset section of Heckenmueller’s balance sheet at Decembe. 01, 2007. Show supporting computations in good form. (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Heckermueiler‘s income statement for the year ended December 31. 2007. Show supporting computations in good form. (AICPA adapted) 7 Explain the conceptual issues related to goodwill. Goodwill is unique because unlike ’ receivables, inventories, and patents that a company can sell or exchange lhdiVlldtJallyflln'the marketplace, goodwill can be identified only with the business as a whole. w- WW-W should not capitalize goodwill generated internally in the accounts. because measuring the components of goodwill is too complex and associating any costs with future benefits too difficult. The future benefits of goodwill may have no relationship to the costs incurred in the development of that goodwill. Goodwill may exist even in the absence of specific costs to develop it. Costs to maintain and restore goodwill are not capitalized. - 3_ Describe the accounting procedures for recording goodwill. To record goodwill. a company comEares the fair market value of the net tangible and identifiabe In angi e asse 5 wt t e purchase price 0 the acguired business. The difference is considered goo w: . oodwni is the residual—the excess of cost over fair value of the identifiable net aesets acquired. Goodwill is often identified on the balance sheet as the excess of cost over the fair value of the net assets acquired. hMbwlu, s. Nix/Harte mu: ~PmrL Hammer lime 0F NET ’TMMME 4k lNTWMM M13 Tom Tmnlms It lM’FethUL WTS — ’l'b’l'm le‘bmfi CW-l-l-i Purpose: (LO. 5, 6) This exercise will review the procedure for determining the recorded value for purchased goodwill. u. Sharon Gilkey, owner of Montana Designs, is negotiating with Chris Buffet for the purchase of Hospitality Galleries. The condensed balance sheet of Hospitality is given in abbreviated form below. - - ' Hospitality Galleries Balance Sheet As of December 31, 2006 Assets Liabilities and Stgckholders‘ Eguigg Cash $150,000 Accounts payable $ 75,000 Land 100,000 Long-term notes payable 450,000 Building (net) 300,000 Total liabilities 525,000 Equipment (net) 275,000 Common stock $300,000 _ Copyright (net) 40,000 Retained earnings 40.000 340,000 Total assets M Total liabilities and stockholders equity ‘ M Sharon and Chris agree that: 1. The fair value of the land exceeds its book value by $70,000. 2. The fair value of the equipment is less than its book value by $15,000. Chris agrees to sell Hospitality Galleries for $530,000. instructions (a) Prepare the entry to record the purchase of the gallery on Shawn's books. (b) Prepare the entry to record the amortization of goodwill for 2007. (deem (ya how To 1M7 IQ Marten/liven, frucvwi FOL cm Drum»- MM), HMWLSTA-N) SIMPLI‘Y. 6L Explain the accounting issues related to in angible-asset impairments. lm airment of a Ion -lived asset occurs when the car in amount of the asset is not recoverable. Companies use a recoverability test and a fair value test to determine im airments for limits -I e tntan ible asse 3. ex use on y a fair value test for indefinite—tife intangibles. Goodwill impairments require a two-step grocess: First, test the fair value of the refining unit, t en 0 e air va as test on impied goo wii. . INLUJLDES lMPthCNT or 4. mm Hpgg? . PPM; (TANHlALbS) - umrcb MHZ IMTHN‘HW lLLUSTRATlON 'UINHMITE'D LIVE} lameness; - 60-11mm» ACCOUNTING FOR IMPAIRMENTS OF PROPERTY, PLANT AND EQUIPMENT AND LIMITED LIFE INTANGIBLES (L_.O. 7) 3 M 3 IF CIT-\won-lC—F; ~-« (cf-N «cmtli'm' Wow 0 N q A summary of the key concepts in accounting for impairments is presented below: fit? 1 A recoverabili test is used to determine whether an im airment has occurred: if the sum of the ex ected future net undiscounted cash flows ' from the use of the asset and its eventual dis osrtion [3 less than the car in amounto the asset the asset has been im aired. " test indicates that an im airment has occurred. a loss is computed. The im airment loss is the amount b which the ca in amount of the asset exceeds its fair value- tied—air value of an asset is measured by: its market value Iif an active market exrstsl or ifie Eresent value of _) expected future net cash flows {if an active market does not exist). If an asset is to be disposed of instead of held for use, the asset's net realizable value (fair value ess cost to sellj IS use§ as a measure of the net cash flows that will be received from this asset. e ue tto re nizin the loss from im airment. the following guidelines are to be followed: If the asset is to be held for use. it will be depreciated based on the new cost basis. If the asset is to be sold. no more depreciation is taken once the asset is no longer used. 1. 2. 3. Restoration of the impairment loss is not permitted for an asset which is held for use. 4. Restoration of the impairment loss is allowed for an asset held for sale. Because assets held for disposal will be recovered through sale rather than throug use in operations, they are continually revalued. Eachperiod they are reported at the lower of cost or net realizable value. Thus, an asset held for disposal can be written up or down in future periods. as long as the write-up does not Eroduca a new caggng value greater than the ca ing amount of the asset before an ad'ustment was me e to re act a ecrsion o dispose of the asset. ’ ladies continuin'fi' e ‘ ction). Thus. they are not classified y‘ .f..' r " ‘ senses‘ianiiéiiesai" ' = sees {idea A e‘l'pthe operations (fieneratly inth] 'as extraordinary items". TIP: The impairment rule for goodwill-is:agtwo-stepzprocess. first. the fair value of the reporting unit should be compared to its carrying amoUnt‘including goodwill. If the fair value of the reporting _ unit is greater than the cagy' ing amount! goodwill is considered not to be impaired. However, if the fair value of there ortin iunrtl’is'flessi sing-rigging amount 'of the net assets, then a second step must be @rformed to"deterrnine"whether impairrnentjhas occurred. in the second step, the fair value of the oodwilt must be determined (implied value of goodwill) and compared to itsca in amount to detemtinejt an im airment E as occurra, - - it" ' .,:.j..=.1 If " _ TIP: The im airment test for an indefinlleé-lifesfasset bitten-than ' oodwill‘is a fair value test. This test compares e-fair vs no of the assetwith the asset's ca in amount. If the fair value of the asset ‘, , .. . ._ _ 7 A , , _ nized. Companies use this one-step cause many In e nits-life assetsi‘easilymeet the recoverability test (because cash flows may extend many years into the future); ‘As a result; the recoverability test is not used. . UMww L4H: ’KNTKNWWS: 7. man: 316? 1: HM \MMIKMENT W)? ' .uwumwuw WU Stan; WWW JMPMMMSNT (/04; [M9MKHLNT Lou = NET RG‘OK \lAuJLe — [3mm \lwm WM lFAcrNE MWET 9N5”: i; MINE, Hmr I“ Wm H To 01 LET: WWW} OFF MMMT \lPrLLLE M“ N u 11' Ag NOT HCLD (wt-9:. Purpose: (LO. 7) This case will examine the accounting for impairments. In some cases, the carrying amount of a long-lived asset (property. plant, and equipment or intangible asset) is not recoverable, and therefore a write-off is needed. This write-off is referred to as an impairment. For each type of long-lived asset listed below, indicate the impairment test suitable for that kind of asset. ' ‘ ' ‘ Type of Long-Lived Asset . Impairment Test ” ‘Property. plant. and equipment ~ Limited—life intangible -- indefinite-life intangible other than goodwill Goodwill CN—b’. Purpose: (LO. 7). This exercise will illustrate the accounting for impairment of an intan ible asset withalimited-life. . 13m The following information relates to a patent owned by Pulido Company: Cost $4,300,000 Carrying amount 2.100.000 Expected future net cash flow 1.900.000 Fair value 1,500,000 Instructions (3) (b) (C) (d) (e) Prepare the journal entry (it any) to record the impairment of the asset at December 31, 2006, assuming Puiido wili continue to use the asset in the future. Using the same assumption as part (a) abov , prepare the journal entry to record amortization expense for 2007 assuming the ass has a remaining useful life of 4 years at the beginning of 2007. Using the same assumption as part (a) above. prepare the journal entry (if any) at December 31, 2007. assuming the fair value of the asset has increased to $2,400,000. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2006, assuming Pulido ceased using the patent at the end of 2006 and intends to dispose of the patent in the coming year. Pulido expects to incur a $12,000 Cost of disposal. Using the same assumption as part (d) above, prepare the journal entry at December 31. 2007 for amortization for 2007, assuming the asset has not been sold at that time. Using the same assumption as part (0) above, prepare the journal entry at December 31. 2007 assuming the asset has not been sold ‘at that time and the fair value of the asset has increased to $2,400,000. indicate the statement classification of the account, Loss on impairment. 10. '11. indicate the presentation of intangible assets and related items. The reporting of intangibles differs from the reporting of property, plant, and equipment in that contra accounts are not normally shown. On the balance sheet all intangible assets other than goodwill can be reported as a single separate item. if goodwill is present, it must be reported as a separate item. Contra accounts are normally not shown separately for intangibles. On the income statement, companies should report amortization expense and impairment losses for intangible assets as part of continuing operations. Goodwill impairment losses should be presented as a separate line item in the continuing Operations section, unless the goodwill impairment is asso’ciated with a discontinued operation. The notes to the financial statements have additional detailed information. Financial statements must disclose the total R & 0 costs charged to expense each period for which an income statement is presented. Understand the accounting treatment for computer software costs. Costs incurred in creating a software product should be charged to R & D expense when incurred until technological feasibility has been established for the product. Subsequent costs should be capitalized and amortized to current and future periods. Software that a company purchases for sale or lease to third parties and has alternative future uses may be capitalized and amortized using the greater of the percentcf-revenue approach or the straight—line approach. 'This material is covered in Appendix 12A in the text. l t i own—1: ‘E12-19 (Accounting for Computer Software Costs} During 2007, Delaware Enterprises inc. spent $5,000,000 developing its new "Dover" software package. Of this amount, $2,200,000 was Spent before technological feasibility was established for the product, which is to be marketed to third parties. The package was completed at December 31, 2007. Delaware expects a useful life of 8 years for this product with total revenues of $16,000,000. During the first year (2008), Delaware realizes revenues of $3,200,000. Instructions {3) Prepare journal entries required in 2007 for the foregoing facts. (b) Prepare the entry to record amortization at December 31, 2008. (c) At what amount should the computer software costs be reported in the December 31, 200?, bal. ance sheet? Could the net realizable value of this asset affect your answer? (d) What disclosures are required in the December 31, 2008, financial statements for the computer software-costs? _ (e) How would your answers for (a), (b), and (c) be different if the computer software was devel- oped for internal use? ...
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This note was uploaded on 09/26/2011 for the course UGBA 120a taught by Professor Cerf during the Summer '08 term at Berkeley.

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Chapter 12 Completed Notes - int LHA’PTL‘M I0 Mi, this...

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