Gray Co. was granted a patent on January 2, Year 5, and appropriately capitalized $45,000
of related costs. Gray was amortizing the patent over its estimated useful life of 15 years.
During Year 8, Gray paid $15,000 in legal costs in successfully defending an attempted
infringement of the patent. After the legal action was completed, Gray sold the patent to the
plaintiff for $75,000. Gray’s policy is to take no amortization in the year of disposal. In its
Year 8 income statement, what amount should Gray report as gain from sale of patent?
Answer (B) is correct.
The patent was capitalized at $45,000 in Year 5. Annual amortization of
$3,000 ($45,000 ÷ 15 years) for Year 5, Year 6, and Year 7 reduced the
carrying amount to $36,000. The $15,000 in legal costs for successfully
defending an attempted infringement may be capitalized, which increases
the carrying amount of the patent to $51,000 ($36,000 + $15,000).
Accordingly, the gain from the sale is $24,000 ($75,000 – $51,000).
Which of the following assets, if any, acquired this year in an exchange transaction is(are)
Answer (B) is correct.
Goodwill is tested for impairment at least annually but is never
amortized. Trademarks, however, may be amortized but only if they have
finite useful lives.
Goodwill should be tested for value impairment at which of the following levels?
Answer (B) is correct.
The cost of an acquired entity minus the net amount assigned to assets
acquired and liabilities assumed is goodwill. Goodwill is not amortized.
However, goodwill is assigned to a reporting unit that benefited from the
business combination for the purpose of testing impairment. Testing occurs each year at the same time, but different reporting units may be tested at different times. Furthermore, additional testing also may be indicated. Potential impairment of goodwill is deemed to exist only if the carrying amount (including goodwill) of a reporting unit is greater than its fair value. Thus, accounting for goodwill is based on the units of the combined entity into which the acquired entity was absorbed. A reporting unit is an operating segment or one of its components, that is, one level below an operating segment. A component qualifies as a reporting unit if (1) it is a business for which discrete financial information is available, and (2) segment management regularly reviews its operating results. However, similar components are aggregated. These provisions, including the determination of operating segments, apply even if the reporting entity is not required to report segment information.
A company should recognize goodwill in its balance sheet at which of the following points?
Answer (B) is correct. Goodwill can be recognized only in a business combination. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
On December 31, year 3, Byte Co. had capitalized software
costs of $600,000 with an economic life of four years. Sales for
year 4 were 10% of expected total sales of the software. At December
31, year 4, the software had a net realizable value of
$480,000. In its December 31, year 4 balance sheet, what amount
should Byte report as net capitalized cost of computer software?
(b) The software should be valued at the lower of its
unamortized cost or its net realizable value. The software’s
unamortized cost is $450,000, which is equal to $600,000 –
$150,000 ($600,000/4). Answer (c) is incorrect because the
software’s unamortized cost is less than its net realizable value.
On January 2, year 4, Judd Co. bought a trademark from
Krug Co. for $500,000. Judd retained an independent consultant,
who estimated the trademark’s remaining life to be fifty years. Its
unamortized cost on Krug’s accounting records was $380,000. In
Judd’s December 31, year 4 balance sheet, what amount should be
reported as accumulated amortization?
(c) Judd Company would record the trademark at its
cost of $500,000. The unamortized cost on the seller’s books
($380,000) is irrelevant to the buyer. The trademark has a remaining
useful life of fifty years. Therefore, the year 4 amortization
expense and 12/31/Y4 accumulated amortization is $10,000
($500,000 ÷ 50 years).
On January 2, year 4, Paye Co. purchased Shef Co. at a cost
that resulted in recognition of goodwill of $200,000. During the
first quarter of year 4, Paye spent an additional $80,000 on expenditures
designed to maintain goodwill. In its December 31,
year 4 balance sheet, what amount should Paye report as goodwill?
(b) A company should record as an asset the cost of
intangible assets such as goodwill acquired from other entities.
Costs of developing intangible assets such as goodwill “which
are not specifically identifiable, have indeterminate lives, or are
inherent in a continuing business and related to an entity as a
whole” should be expensed when incurred. Therefore, only the
$200,000 (and not the additional $80,000) should be capitalized
as goodwill. Goodwill should not be amortized.
Northern Airline purchased airline gate rights at Newark
International Airport for $2,000,000 with a legal life of five years.
However, Northern has the ability and right to extend the rights
every ten years for an indefinite period of time. Over what period
of time should Northern amortize the gate rights?
(d) In determining the useful life of an intangible,
consideration should be given to the legal, regulatory or contractual
life, including rights to extension. Since Northern has the
ability and intent to renew the rights indefinitely, the intangible
should not be amortized.
On January 2, year 1, Lava, Inc. purchased a patent for a new
consumer product for $90,000. At the time of purchase, the patent
was valid for fifteen years; however, the patent’s useful life
was estimated to be only ten years due to the competitive nature of the product. On December 31, year 4, the product was permanently
withdrawn from sale under governmental order because of
a potential health hazard in the product. What amount should
Lava charge against income during year 4, assuming amortization
is recorded at the end of each year?
(c) Before year 4, Lava would record total amortization
of $27,000 [($90,000 × 1/10) × 3 years], resulting in a 12/31/Y3
carrying amount of $63,000 ($90,000 – $27,000). Since the
patent became worthless at 12/31/Y4 due to government prohibition
of the product, the entire carrying amount ($63,000)
should be charged against income in year 4 as an impairment
What does ASC Topic 350 require with respect to accounting
(d) Goodwill should not be amortized. Instead, goodwill
remains at the amount established at the time of the business
combination unless it is determined to be impaired. Goodwill
should be tested for impairment annually, or more often if events
and circumstances indicate that goodwill may be impaired.