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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
$120,00
0
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
years
30
years
38
years
This 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?
$245,00
0
$204,00
0
$41,000
$0
Only 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
$275,00
0
$375,00
0
$500,00
0
The 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)
$250,000
Machine B ($250,000/10 (amortization)25,
years)
000
Total R & D Expense
$275,000
(2005)
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, onefourth 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
$490,00
0
The 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
Research and development costs not included above were:
Depreciation
Salaries
Indirect costs appropriately allocated
Materials
What was Ball's total research and development expense in 2005?
$1,080,0
00
$1,380,0
00
$1,580,0
00
$1,780,0
00

$400,00
0
$300,00
0
700,000
200,000
180,000

The 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% decliningbalance method of depreciation for tax purposes instead of the straight-line
method?
$1,50
0
$3,00
0
$4,50
0
$5,00
0
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?
Joha Abc
n
o
Yes Yes
Yes No
No Yes
No No
The 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 $100,00
projects
0
Equipment purchased for current projects
200,000

only
Research and development salaries for
400,000
current projects
Legal fees to obtain patent
50,000
Material and labor costs for prototype
600,000
product
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
$1,000,0
00
$1,220,0
00
$1,350,0
00
Equipment 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?
$280,00
0
$295,00
0
$340,00
0
$350,00
0
The 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 unit
Each acquisition unit
The entire business as a
whole
Goodwill 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:
Descripti Estimated
Cost
on
life
Sales
$47,00
10 years
office
0
Warehous
25 years 75,000
e
Parking
15 years 18,000
lot
Amortization of leasehold improvements for 2006 should be:
$7,000
$8,900
$12,20
0
$14,00
0
The 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:
$486,00
0
$504,00
0
$510,00
0
$513,00
0

The 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?
$45,60
0
$45,00
0
$44,00
0
$43,20
0
Six 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 eightyear 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
Design, construction, and testing of preproduction
prototypes and models

$150,00
0
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?
$150,00
0
$200,00
0
$350,00
0
$525,00

0
All 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 assets estimated useful life?
Straight- Double-declining
line
balance
Yes
Yes
Yes
No
No
Yes
No
No

Salvage 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, onefourth 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?
$1,80
0
$2,00
0
$3,80
0
$4,50
0
The 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
asset
Denominator = the sum of numbers (digits) for each year in the life of the asset

For 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:
Year

Depreciable
Factor
cost

Annual
depreciation

Accumulated
depreciation

Carrying
value
$12,80
0

2003 $18,000

x 4/10 =$7,200

$ 7,200

$20,000 - 7,200 =

2004 18,000

x 3/10 =5,400

12,600

20,000-

12,60
=7,400
0

2005 18,000

x 2/10 =3,600

16,200

20,000 -

16,20
=3,800
0

2006 18,000

x 1/10 =1,800

18,000

20,000 -

18,00
=2,000
0

x
=18,000
18,000
2,000
10/10
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.

Total 18,000

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
$38,00
0
Correct! 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?
$798,00
0
$800,00

0
$819,00
0
$820,00
0
The 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 sumof-the-years'-digits method. The accumulated depreciation on this machinery at
March 31, 2006 should be:
$192,00
0
$180,00
0
$120,00
0
$100,00
0
$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?
$48,00
0
$38,40
0
$32,00
0
$21,60
0
Depreciation in 2004 = $240,000(2/10) = $48,000
Depreciation in 2005 = ($240,000-$48,000)(2/10) = $38,400

The 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?
$105,00
0
$110,00
0
$120,00
0
$125,00
0
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?
$11,20
0
$0
$5,600
$2,800
Twenty 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?
$2.5

0
$2.6
0
$3.2
0
$3.3
0
The 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$216,00
$128,000 =
0
Equipment purchase
50,000
Book value of equipment sold
(9,000)
Depreciation in 2005
?
Equals net equipment at end of 2005: $379,000$153,000 = $226,000
Solving 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.

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