Question 1:Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?$0 $15,000 $40,000 $120,000 When the intangible asset can be renewed indefinitely, and the company has the positive ability and intent to continuously renew, then the intangible asset is an indefinite life intangible. Indefinite life intangibles are not amortized, but are tested for impairment on an annual basis.

Question 2:A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes?0 years.25 years30 years38 yearsThis copyright has a definite life; the question is what is the length of that life? The life assigned to the intangible asset is the shorter of its legal and useful life. The useful life is shorter than the legal life, so this copyright is amortized over 25 years.

Question 3:During 2005, Kent Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1, 2005. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated economic life of the patent is 10 years. What amount should Kent capitalize for the patent on July 1, 2005? $245,000$204,000$41,000$0Only the legal fees and other registration costs are capitalized to the patent account. These costs are paid to outside parties. The research and development costs are expensed under ASC 730. All research and development is expensed as incurred.

Question 4:Wizard Co. purchased two machines for $250,000 each on January 2, 2005. The machines were put into use immediately. Machine A has a useful life of 5 years and can only be used in one research project. Machine B will be used for 2 years on a research and development project and then used by the production division for an additional 8 years. Wizard uses the straight-line method of depreciation. What amount should Wizard include in 2005 research and development expense?$75,000 $275,000$375,000$500,000The cost of facilities, equipment, materials, etc. acquired for research and development purposes is expensed when incurred unless the acquired item has expected future alternative uses either in other research and development undertakings or in ongoing operations, in which case the cost is capitalized. The cost of research and development-related assets capitalized is amortized as research and development expense over the useful life of the asset.Since Machine A can be used only in one research project, its cost should be expensed when the machine is acquired. Since Machine B will be used for an expected 8 years by the production division after it is used for 2 years for research and development, it should be capitalized and amortized over its expected (total) life of 10 years. Therefore, Wizard's 2005 research and development expense will be:Machine A (cost) $250,000Machine B ($250,000/10 years)

(amortization)25,000

Total R & D Expense (2005)

$275,000

Question 5:A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method. $30 million $12.5 million $10 million $22.5 million The depletion rate = [$40 + (.25)$100 $60)/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of

goods sold = $12,500,000 $10,000,000 = $22,500,000. Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).

Question 6:Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. Under U.S. GAAP, what amount should Alta capitalize related to the patent?$ 40,000$ 50,000$ 90,000$490,000The legal cost for applying for a patent can be capitalized. Alta can also capitalize the costs associated with the legal defense of the patent. This response correctly includes the legal costs associated with applying for and defending the patent.

Question 7:In 2005, Ball Labs incurred the following costs:Direct costs of doing contract research and development work for the government to be reimbursed by governmental unit

$400,000

Research and development costs not included above were:

Depreciation$300,000

Salaries 700,000Indirect costs appropriately allocated 200,000Materials 180,000What was Ball's total research and development expense in 2005?$1,080,000$1,380,000$1,580,000$1,780,000The contract work performed for the government is not research and development expense to Ball but rather is normal contracting cost that will be applied against contract revenue in computing contract profit.Research and development for Ball includes efforts aimed at discovering and translating new knowledge toward new products and services that Ball will produce and market. All four costs in the question are included in research and development.

The sum of $1,380,000 is the firm's research and development expense for 2005 ($300,000 + $700,000 + $200,000 + $180,000).

Question 8:Ajax Corp. has an effective tax rate of 30%. On January 1, 2000, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during 2000 by using the 150% declining-balance method of depreciation for tax purposes instead of the straight-line method? $1,500 $3,000 $4,500 $5,000 The two depreciation amounts for 2000, the first service year of the asset, are: SL, $10,000 ($100,000/10); and 150% DB, $15,000 (1.5 x SL amount or 1.50/10 x $100,000). The difference, $5,000 is the excess of the 150% DB deduction over the SL deduction. The tax benefit of the $5,000 excess is $1,500 ($5,000 x .30). The firm will pay $1,500 less in taxes if it uses the 150% DB method compared with the SL method.

Question 9:Johan Co. has an intangible asset, which it estimates will have a useful life of 10 years, while Abco Co. has goodwill, which has an indefinite life. Which company should report amortization in its financial statements?Johan

Abco

Yes YesYes NoNo YesNo NoThe intangible asset has a definite life and is amortized. Goodwill has an indefinite life, and is not amortized but is tested for impairment.

Question 10:Stam Co. incurred the following research and development project costs during the current year: Equipment purchased for current and future projects

$100,000

Equipment purchased for current projects only

200,000

Research and development salaries for current projects

400,000

Legal fees to obtain patent 50,000Material and labor costs for prototype product

600,000

The equipment has a five-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year end? $ 450,000$1,000,000$1,220,000$1,350,000Equipment used for more than one project is capitalized and depreciated as usual, except that the expense is classified as R & D expense. Equipment used only for current projects is expensed as R & D entirely in the period of purchase. Therefore, total R & D expense for this period is the following sum: ($100,000/5) + $200,000 + $400,000 + $600,000 = $1,220,000. The legal fees are capitalized to the patent account.

Question 11:West, Inc. made the following expenditures relating to Product Y:

Legal costs to file a patent on Product Y: $10,000. Production of the finished product would not have been undertaken without the patent.

Special equipment to be used solely for development of Product Y: $60,000. The equipment has no other use and has an estimated useful life of 4 years.

Labor and material costs incurred in producing a prototype model: $200,000. Cost of testing the prototype: $80,000.

What is the total R & D cost that will be expensed when incurred?$280,000$295,000$340,000$350,000The first cost listed is capitalized to patents because it is an amount paid to an external party.The last three costs listed are all classified as research and development. The special equipment has no other use and is expensed immediately. Although the equipment has a 4-year life, it has no other use beyond this project and thus qualifies for immediate expensing. The labor, materials, and testing are all routine research and development costs. Thus, the total cost to be expensed immediately is $340,000 ($60,000 + $200,000 + $80,000).

Question 12:Goodwill should be tested for value impairment at which of the following levels?Each identifiable long-term asset.Each reporting unitEach acquisition unitThe entire business as a

wholeGoodwill is included in an asset group when the group is a reporting unit. A reporting unit is an operating segment or one level below.

Question 13:On January 2, 2005, Ral Co. leased land and a building from an unrelated lessor for a 10-year term. The lease has a renewal option for an additional 10 years, but Ral has not reached a decision with regard to the renewal option. In early January of 2005, Ral completed the following improvements to the property: Description

Estimated life

Cost

Sales office

10 years$47,000

Warehouse

25 years 75,000

Parking lot

15 years 18,000

Amortization of leasehold improvements for 2006 should be:$7,000$8,900$12,200$14,000The shorter of the lease term and useful life of the leasehold improvements is used for amortization because leasehold improvements revert to the lessor at the end of the lease term. A 10-year lease term is used because renewal is uncertain. The leasehold improvements were capitalized at the beginning of 2005. Annual amortization (and therefore amortization for 2006) is $14,000 ($47,000 + $75,000 + $18,000)/10. Ten years is used for each asset because each has a useful life of at least 10 years and the lease term is 10 years as of the beginning of 2006. The assets cannot be amortized over a period greater than 10 years because the lease will be concluded in 10 years.

Question 14:In which of the following situations is the units of production method of depreciation most appropriate?An asset's service potential declines with use.An asset's service potential declines with the passage of time.An asset is subject to rapid obsolescence.An asset incurs increasing repairs and maintenance with use.This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset. Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that

can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.

Question 15:A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year?Determine the current year's amortizable amount and report the current-year's amortization expense. Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement. Perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement. Goodwill impairment testing permits a qualitative "pre-step" test to determine if it is more likely than not that the goodwill is impaired. This pre-step can result in considerable savings to companies who do not have to complete the quantitative tests associated with testing and measuring goodwill impairment.

Question 16:On January 1, 2000, Nobb Corp. signed a 12-year lease for warehouse space. Nobb has an option to renew the lease for an additional 8-year period on or before January 1, 2004. During January 2002, Nobb made substantial improvements to the warehouse. The cost of these improvements was $540,000, with an estimated useful life of 15 years. At December 31, 2002, Nobb intended to exercise the renewal option. Nobb has taken a full year's amortization on this leasehold.In Nobb's December 31, 2002 Balance Sheet, the carrying amount of this leasehold improvement should be:$486,000$504,000$510,000$513,000The remaining lease term at the end of 2002 is nine years (the 12-year lease term began January 1, 2000). The eight-year option is added to the term at that point to yield a revised lease term of 17 years (9 + 8). Leasehold improvements are amortized over the shorter of lease term (17 years) or useful life (15 years) because leasehold improvements revert to the lessor. Thus, the amortization of the leasehold improvements is $36,000 ($540,000/15). At the end of 2002, the carrying value of the leasehold improvement is $504,000 ($540,000-$36,000). A full year of amortization is warranted in 2002 because the improvements were completed in January.

Question 17:Star Co. leases a building for its product showroom. The 10-year non-renewable lease will expire on December 31, 2007. In January 2002, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is 8 years. Star uses the straight-line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30, 2002, Balance Sheet? $45,600$45,000$44,000$43,200Six years remained in the lease term at the point the leasehold improvements were made. Thus, they should be amortized over six years, rather than over their eight-year useful life. Leasehold improvements revert to the lessor at the end of the lease term. As of June 30, 2002, the leasehold improvements have been used only 1/2 year. Thus, the net balance in leasehold improvements is $44,000 [$48,000-($48,000/6)(1/2)].

Question 18:During 2005, Orr Co. incurred the following costs: Research and development services performed by Key Corp. for Orr

$150,000

Design, construction, and testing of preproduction prototypes and models

200,000

Testing in search for new products or process alternatives 175,000

In its 2005 income statement, what should Orr report as research and development expense?$150,000$200,000$350,000$525,000All three listed costs are included in research and development expense. Their sum is $525,000. The first is the cost of payments to an outside party to perform R & D. This cost is as much R & D as internally incurred costs - their objective is the same.The second and third costs meet the definition of R & D costs incurred internally. R & D includes costs of efforts to discover new knowledge and to translate that new knowledge into new products, processes, and services.

Question 19:

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct? It is prohibited. It is required when the reversal is considered permanent. It must be disclosed in the notes to the financial statements. It is encouraged, but not required. All intangibles are subject to impairment, but the resulting impairment losses cannot be reversed. Although impairment losses on plant assets held for disposal can be reversed to the extent of previous losses, this is not the case for intangibles.

Question 20:What factor must be present to use the units of production (activity) method of depreciation?Total units to be produced can be estimated.Production is constant over the life of the asset.Repair costs increase with use.Obsolescence is expected.Without an estimate for total units to be produced, depreciation could not be computed. Annual depreciation under this method is: [(Cost-salvage value)/(Total estimated production)](units produced year). The quantity in square brackets is the rate of depreciation per unit.

Question 21:A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset’s estimated useful life? Straight-line

Double-declining balance

Yes YesYes NoNo YesNo NoSalvage value is the portion of the asset's cost not subject to depreciation. Total depreciation, under any method, is limited to depreciable cost (cost less salvage value). The declining balance methods do not subtract salvage when computing depreciation. Care must be taken to avoid depreciating an asset beyond salvage value.

Question 22:A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire

production for the period was sold. What amount of depletion is recognized during the current year under the full costing method? $20 million $12.5 million $10 million $21 million The depletion rate = ($40 + $100 + $60)/20 = $10/ton. Depletion = 2,000,000($10/ton) = $20,000,000. Depletion for a period is the cost of the deposit allocated to the inventory removed for the period. In this case, the entire amount is included in cost of goods sold because there is no ending inventory. However, if there had been ore left at the end of the period, the $10/ton rate would have been applied to the units remaining. That would not change the answer to the question, however.

Question 23:Spiro Corp. uses the sum-of-the-years' digits method to depreciate equipment purchased in January 2003 for $20,000. The estimated salvage value of the equipment is $2,000, and the estimated useful life is four years. What should Spiro report as the asset's carrying amount as of December 31, 2005? $1,800$2,000$3,800$4,500The carrying amount (book value) of a depreciable asset is its original cost less accumulated depreciation. Under sum-of-the-years' digits method of calculating depreciation expense (and, therefore, accumulated depreciation), the net depreciable cost (original cost less estimated salvage value) is multiplied by a factor consisting of: Numerator = the number of years the current year is from the end of the life of the assetDenominator = the sum of numbers (digits) for each year in the life of the assetFor Spiro, the net depreciable cost is $20,000-$2,000 = $18,000. Since the equipment has an estimated useful life of four years, the sum of the digits for each year would be 1 + 2 + 3 + 4 = 10, the denominator for calculating each year's depreciation. Depreciation for the four years would be:

YearDepreciable cost

FactorAnnual depreciation

Accumulated depreciation

Carrying value

2003$18,000 x 4/10 =$7,200 $ 7,200 $20,000 - 7,200 =$12,800

200418,000 x 3/10 =5,400 12,600 20,000-12,600

=7,400

200518,000 x 2/10 =3,600 16,200 20,000 -16,200

=3,800

200618,000 x 1/10 =1,800 18,000 20,000 - 18,00 =2,000

0

Total 18,000x 10/10

=18,000 18,000 2,000

Thus, at the end of 2005 the carrying amount is $3,800, which also can be calculated as salvage value 2,000 + (1/10 x $18,000) = $2,000 + $1,800 = $3,800.

Question 24:Tech Co. bought a trademark on January 2, two years ago. Tech accounted for the trademark as instructed under the provisions of GAAP during the current year. The intangible was being amortized over 40 years. The carrying value at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark. What amount should Tech report as amortization expense for the current year? $0$922$1,000$38,000Correct! This intangible has an indefinite life because it can be renewed and because management believes its cash flow will be generated indefinitely. Under GAAP, indefinite life intangibles are not subject to amortization. All intangibles are subject to impairment, however.

Question 25:On January 1, 2004, Bay Co. acquired a land lease for a 21-year period with no option to renew.The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, 2005, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building's estimated market value will be $420,000. What is the building's carrying amount in Bay's December 31, 2005 Balance Sheet?$798,000$800,000$819,000$820,000The building is a leasehold improvement because it reverts to the lessor at the end of the lease. The residual value belongs to the lessor and is not relevant to the lessee. The building was completed at the beginning of the second year of the lease. Therefore, the total cost to the lessee of $840,000 is amortized over 20 years, not 21. The carrying value of the leasehold improvement at the end of 2005, the first year of the building's life but the second year of the lease, is $798,000 = $840,000(19/20).

Question 26:

On April 1, 2004, Kew Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years'-digits method. The accumulated depreciation on this machinery at March 31, 2006 should be: $192,000$180,000$120,000$100,000$180,000, the correct answer, equals $300,000[(5 + 4)/(5 + 4 + 3 + 2 + 1)]. Two full years of depreciation have been recorded, and the SYD method uses the number of years left at the beginning of each year as the numerator of the fraction used in depreciation. At the beginning of the first and second years, five and four years of the asset's life remained, respectively. The denominator is the sum of the digits up to the asset's useful life (5).

Question 27:South Co. purchased a machine that was installed and placed in service on January 1, 2004 at a cost of $240,000. Salvage value was estimated at $40,000. The machine is being depreciated over 10 years by the double declining balance method. For the year ended December 31, 2005, what amount should South report as depreciation expense?$48,000$38,400$32,000$21,600Depreciation in 2004 = $240,000(2/10) = $48,000Depreciation in 2005 = ($240,000-$48,000)(2/10) = $38,400The DDB method's rate is always twice the straight-line rate, or 2/useful life. The method does not subtract salvage value when computing depreciation, but it also does not reduce book value below salvage value. The depreciation in any year is the rate times the beginning net book value of the asset.

Question 28:A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners? $105,000 $110,000

$120,000 $125,000 The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.

Question 29:Hull Co. bought a trademark from Roe Corp. on January 1, 2005, for $224,000.Hull retained an independent consultant who estimated the trademark's remaining useful life to be 20 years. The trademark most likely will not be renewed. Its unamortized cost on Roe's accounting records was $112,000. In Hull's December 31, 2005 Balance Sheet, what amount should be reported as accumulated amortization?$11,200$0$5,600$2,800Twenty years is the estimated useful life. After one year, the accumulated amortization is $11,200 = $224,000/20. The purchase cost is capitalized. The book value of the previous owner is not relevant to Hull.

Question 30:Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for the extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold. What would Cantor's depletion amount be per ton for the current year? $2.50$2.60$3.20$3.30The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site. The depletion rate per ton is ($2,000,000 + $500,000-$100,000)/750,000 = $3.20. This rate is applied to the units removed each period to determine depletion for that period.As such, it allocates the total cost of the obtaining and developing the resource to each unit of resource removed.

Question 31:

Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 2005 and 2004. During 2005, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000. What amount should Ichor report as depreciation expense for 2005?

$19,000

$25,000

$31,000

$34,000

Net equipment at end of 2004: $344,000-$128,000 =

$216,000

Equipment purchase 50,000Book value of equipment sold (9,000)Depreciation in 2005 ?Equals net equipment at end of 2005: $379,000-$153,000 = $226,000Solving for depreciation yields $31,000 depreciation for 2005.

Question 32:Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs? Litigation costs would be capitalized regardless of the outcome of the litigation. Litigation costs would be expensed regardless of the outcome of the litigation. Litigation costs would be capitalized if the patent right is successfully defended. Litigation costs would be capitalized only if the patent was purchased rather than internally developed. Litigation costs can be capitalized only if the defense of the patent was successful.