11.8 Exercises
Chapter 11
Exercise 11.1
Indicate whether the items below are to be capitalized as an intangible asset or expensed. Which account(s) would each item be recorded to?
- Salaries of research staff
- Costs to test prototypes
- Borrowing costs for development of a qualifying intangible asset
- Executive salaries for time spent on development of an intangible asset
- Costs to launch a new product
- Purchase cost of a patent from a third party
- Product research costs
- Costs internally incurred to create goodwill
- Legal costs to successfully defend a patent
- Purchase price of new software
- Training costs for new software
- Direct costs of special programming needed when purchasing new software
- Costs incurred in forming a corporation for purposes of commercializing a new product
- Operating losses incurred in the start-up of a business to manufacture a patented produce
- The purchase cost of a franchise
- The cost of developing a patent
- The cost of purchasing a patent from an inventor
- Legal costs incurred in securing a patent
- The cost of purchasing a copyright
- Product development costs
- Consulting fees paid to a third party for advice on a research project
- The cost of an annual update on payroll software
- Interest or borrowing costs specifically identifiable with an internally developed intangible asset
- Materials consumed in the development of a product at the manufacturing stage for an IFRS company
- Materials consumed in research projects
- General borrowing costs on the company’s line of credit
- Indirect costs allocated to research and development projects
Exercise 11.2
Harman Beauty Products Ltd. produces organic aromatherapy hand soaps and bath oils to retail health stores across North America. The company purchased the trademark and patented recipes for this unique line of soaps and oils, called Aromatica Organica, five years ago for $150,000. Each type of soap or oil is made from a secret recipe only known to the head “chef” at Harman who distributes the ingredients for each type of soap or oil to small groups of “cooks” who then combine the unknown ingredients into a small batch of a particular type of soap or oil. These are then packaged and shipped to fill each order placed by the retail stores through the colourful and user-friendly website developed by Harman.
Required:
- Identify any intangible assets that may appear on the company’s SFP/BS.
- Discuss the importance of the intangible assets to the company’s business.
- Why it is important to record intangible assets on a company’s SFP/BS?
Exercise 11.3
On January 1, 2020, a patent with a book value of $288,000 and a remaining useful life of fourteen years was reported on the December 31, 2019 post-closing trial balance. In 2020, a further $140,000 of research costs was incurred during the research phase. A lawsuit was also brought against a competitor company regarding the use of a patented process for which legal costs of $42,000 were spent. On September 1, 2020, the lawsuit was concluded successfully, and the courts upheld the patent as valid, so the competitor would not be able to continue using the patented process. The company year-end is December 31 and follows IFRS.
Required:
What amount should be reported on the SFP at December 31, 2020, assuming straight-line amortization?
Exercise 11.4
Indicate how the items below are to be reported as assets in the SFP/BS as at December 31, 2020:
- January 1, copyright obtained for a book developed internally for $25,000, which is estimated to have a useful life of five years. Assume the straight-line method for amortization and that all costs were incurred on January 1.
- January 1, copyright obtained for a book purchased from Athabasca University for $35,000 cash with an indefinite useful life.
- On January 1, 2020, an Internet domain name with an indefinite life was purchased in exchange for a three-year, note. The market rate at that time was 8%. The note is repayable in three annual principal and interest payments of $14,500 each December 31.
Exercise 11.5
Trembeld Ltd. was developing a new product, and the following timeline occurred during 2020:
January 1 to March 31, 2020 incurred the following costs:
Materials
Direct labour
$180,000
64,000
April 1, criteria to capitalize costs were met
May 1 to July 31, 2020 incurred the following costs:
Materials
Direct labour
Directly related legal fees
Borrowing costs
270,000
86,000
25,400
8,600
Required:
- How would Trembeld account for the costs above if the company followed ASPE?
- How would Trembeld account for the costs above if the company followed IFRS?
Exercise 11.6
Crellerin Ltd. has a trademark with a carrying value of $100,500 that has an expected life of fifteen years. At December 31, 2020 year-end, an evaluation of the trademark was completed. The following estimates follow:
Fair value
Fair value less costs to sell
Value in use
Undiscounted cash flows
$55,000
$50,000
$115,000
$152,000
Required:
- Determine if the trademark is impaired as at December 31, 2020, if Crellerin follows ASPE and indicators of an impairment exist.
- Determine if the trademark is impaired as at December 31, 2020, if Crellerin follows IFRS and trademark has been assessed for positive conditions of impairment.
- How would the answers to part (a) and (b) change if the trademark had an unlimited expected life?
Exercise 11.7
Fredickson Ltd. purchased a trade name, a patented process and a customer list for $1.2 million cash. The fair values of these are:
Trade name
Patented process
Customer list
$380,000
$400,000
$450,000
Required:
Prepare the journal entry for the purchase.
Exercise 11.8
Below are three independent situations that occurred for Bartek Corporation during 2020. Bartek’s year-end is December 31, 2020.
- On January 1, 2017, Bartek purchased a patent from Apex Co. for $800,000. The patent expires on the same date in 2025 and Bartek has been amortizing the patent over the eight years. During 2020, management reviewed the patent and determined that its economic benefits will last seven years from the date it was acquired.
- On January 1, 2020, Bartek bought a perpetual franchise from Amoot Inc. for $500,000. On this date, the carrying value of the franchise on Amoot’s accounts was $600,000. Assume that Bartek can only provide evidence of clearly identifiable cash flows for twenty years but estimates that the franchise could provide economic benefits for up
to sixty years. - On January 1, 2017, Bartek incurred development costs of $250,000. These costs meet the six criteria, and Bartek is amortizing these costs over five years.
Required:
- For situation (i), how would the patent be reported on the SFP/BS as at December 31, 2020?
- For situation (ii), what would be the amortization expense for December 31, 2020?
- For situation (iii), how would these development costs be reported as at December 31, 2020?
Exercise 11.9
On September 1, 2020, Verstag Co. acquired the net identifiable assets of Ace Ltd. for a cash payment of $863,000. At the time of the purchase, Ace’s SFP/BS showed assets of $900,000, liabilities of $460,000, and shareholders’ equity of $440,000. The fair value of Ace’s assets is estimated at $1,160,000 and liabilities have a fair value equal to their carrying value.
Required:
- Calculate the amount of goodwill and record the entry for the purchase.
- Three years later, determine if there is an impairment, and calculate the impairment loss assuming that Verstag follows IFRS and that goodwill was allocated to one cash-generating unit (CGU). The carrying value of the unit was $1,925,000, the fair value was $1,700,000, the costs to sell were $100,000, and the value in use was $1,850,000.
- How would the answer for part b) be different if Verstag follows ASPE? Fair value is $1,860,000.
Exercise 11.10
Indicate how each of the following items would be classified:
- Excess of purchase price over the fair value of net identifiable assets of another business
- Research costs
- Annual franchise fee paid
- Organizations costs
- Cash
- Accounts receivable
- Prepaid expenses
- Notes receivable
- Research and development acquired in a business combination
- Leasehold improvements
- Brand names
- Music copyrights
- Investments in affiliated companies
- Film contract rights
- Discount on notes payable
- Property, plant, and equipment
- Land
- Development phase activities (meets the 6 criteria for development phase)
- Purchased trademarks
- Excess of cost over fair value of net assets of acquired subsidiary
- Costs of researching a secret formula for a product that is expected to be marketed for at least fifteen years
Exercise 11.11
On January 1, 2019, Josey Corp. received approval for a patent from the Patent Office. Legal costs incurred were $25,000. On June 30, 2020, Josey incurred further legal costs of $35,000 to defend its patent against a competitor trying to sell a knock-off product. The court action was successful. The patent has a life of twenty years.
Required:
- What are the variables to consider in determining the useful life of a patent?
- Calculate the carrying value of the patent as at December 31, 2019, and December 31, 2020.
- Calculate the carrying value of the patent as at December 31, 2020, if management decides on January 1, 2020 that the patent’s life is only fifteen years from the approval date.
- What are the accounting treatment and the issues if the patent was assessed to have an indefinite life?
Exercise 11.12
Below is select information for the following independent transactions for Hilde Co., an ASPE company:
- On January 1, 2020, a patent was purchased from another company for $900,000. The useful life is estimated to be fifteen years. At the time of the sale, the patent had a carrying value on the seller’s books of $915,000. A year later, Hilde re-assessed the patent to have only ten years’ useful life at that time.
- During 2020, Hilde incurred $350,000 in costs to develop a new electronic product. Of this amount, $180,000 was incurred before the product was deemed to be technologically and financially feasible. By December 31, 2020, the project was completed. The company estimates that the useful life of the product to be ten years, and earnings are estimated to be $3.6 million over its useful life. Hilde’s policy is to capitalize any costs meeting the ASPE criteria.
- On January 1, 2020, a franchise was purchased for $1.8 million. In addition, Hilde must also pay 2% of revenue from operations to the franchisor. For the year ended 2020, the revenue from the franchise was $5.6 million. Hilde estimates that the useful life of the franchise is forty years.
- During 2020, the following research costs were incurred; materials and equipment of
$25,000; salaries and benefits of $250,000; and indirect overhead costs of $15,000. (Assume a single entry in 2020 for these costs.)
Required:
- For each independent situation above, prepare all relevant journal entries including any adjusting entries for 2020 (and 2021 for situation i) for Hilde Co. Hilde’s year-end is December 31 and follows ASPE.
- Prepare a partial income statement and balance sheet for 2020, including all re- quired disclosures. Income tax rate is 27%.
- Explain how the accounting treatment for each of the situations above would differ if Hilde was a public company that followed IFRS.
- Explain how limited-life intangibles are tested for impairment for ASPE and IFRS companies. How is the impairment calculated for each standard?
Exercise 11.13
On January 1, 2020, Nickleback Ltd. purchased a patent from Soriato Corp. for $50,000 plus a $60,000, five-year note bearing interest at 8% payable annually. Upon maturity a single lump sum amount of $60,000 will be payable. The market-rate for a note of a similar risk and characteristics is 9%. Nickleback estimates that the patent will have a future life of twenty years. Nickleback follows ASPE.
Required:
Prepare the journal entry for the patent purchase. (Hint: refer to chapter on long-term notes receivable.)
Exercise 11.14
On January 4, 2020, a research project undertaken by Nasja Ltd. was completed and a patent was approved. The research phase of the project incurred costs of $150,000, and legal costs incurred to obtain the patent approval were $20,000. The patent is assessed to have a useful life to 2030, or for ten years. Early in 2021, Nasja successfully defended the patent against a competitor, incurring a legal cost of $22,000. This set a precedent for Nasja who was able to reassess the patent’s useful life to 2035. During 2022, Nasja was able to create a product design that was feasible for commercialization, but no more certainty was known at that time. Costs to get the product design to this stage were $250,000. Additional engineering and consulting fees of $50,000 were incurred to advance the design to the manufacturing stage. Nasja follows IFRS.
Required:
- Prepare all the relevant journal entries for the project for 2020 to 2022, inclusive.
- What is the accounting treatment for the engineering and consulting fees of $50,000?
Exercise 11.15
On December 31, 2020, a franchise that is owned by Horten Holdings Ltd. has a remaining life of thirty-two years and a carrying amount of $1,000,000. Management estimates the following information about the franchise:
Fair value
Disposal costs
Discounted cash flows (value in use)
Undiscounted future cash flows
1,000,000
45,000
1,100,000
1,200,000
Required:
- Determine if the franchise was impaired at the end of 2020 and prepare the journal entry, if any, if Horten follows IFRS.
- Assume now that the recoverable amount was $950,000. Prepare the journal entry for the impairment, if any (IFRS).
- How would your answer in part (a) change if the fair value at the end of 2020 was $1.35M?
- Assume the amounts used for part (a). How would your answers change for parts (a) to (c), if the franchise was estimated to have an indefinite life and last into perpetuity (IFRS)?
- How would your answers change for parts (a) to (c), if the company followed ASPE and an indication of impairment existed?
- How would your answer change for part (d) if the franchise was estimated to have an indefinite life and last into perpetuity (ASPE)?
Exercise 11.16
On January 1, 2020, Boxlight Inc. purchased the net assets from Candelabra Ltd. for $230,000 cash and a note for $50,000. On that date, Candelabra’s list of balance sheet accounts was:
| Accounts | Carrying value | Fair value – if different than carrying value |
|---|---|---|
| Cash | $55,000 | |
| Accounts receivable (net) | 125,000 | |
| Inventory | 200,000 | |
| Land | 15,000 | $35,000 |
| Buildings (net) | 125,000 | 95,000 |
| Equipment (net) | 15,000 | 5,000 |
| Patent (net) | 25,000 | 0 |
| Customer list (net) | 5,000 | 0 |
| Accounts payable | 300,000 | |
| Common shares | 100,000 | |
| Retained earning | 165,000 |
Accounts receivable is shown net of estimated bad debt of $10,000. Buildings, equipment, patent, and customer list are shown net of depreciation/amortization of $75,000, 15,000, 5,000, and 1,000, respectively.
Required:
- Prepare the journal entry to record the purchase.
- What would Boxlight have considered when determining the purchase price for $280,000?
- On December 15, 2020, Boxlight suspected a possible impairment of the reporting entity so it assessed the net assets that had a carrying value of $200,000 on that date. Management determined that the fair value of the net assets, including good- will, was $180,000. Determine if there was any impairment of the reporting entity and record the journal entry, if any. Boxlight follows ASPE.
- Assume now that Boxlight follows IFRS and assesses the cash-generating unit annually for impairment. How would the answer in part (c) change, given the CGU’s values as follows:
Carrying amount
Fair value
Disposal costs
Value in use$180,000
160,000
10,000
170,000 - How would your answer in (c) and (d) change if, one year later, there was an increase in the fair value and recoverable amount to $190,000?
Exercise 11.17
At December 31, Y8, Dufferin Limited has a patent with a carrying value of $435,600.
The following information relates to the patent at December 31, Y8:
| Undiscounted future cash flows | 445,700 |
| Fair value | 378,500 |
| Discounted cash flow (value in use) | 410,200 |
Required:
Prepare any required journal entries at December 31, Y8 assuming,
- Dufferin follows IFRS
- Dufferin follows ASPE
Exercise 11.18
The following information is available for a trademark owned by Centralia Corp at December 31, Y5.
| Carrying value | $2,265,000 |
| Undiscounted future cash flow | $1,965,300 |
| Fair value | $1,759,600 |
| Discounted cash flow (value in use) | $1,549,700 |
The trademark has a remaining life of 10 years, straight-line method is used. Centralia has a December 31 year end.
Required:
Prepare the appropriate journal entries, if any assuming:
- Centralia follows IFRS
- Prepare the journal entry, if any, to record the impairment at December 31, Y5.
- Prepare the journal entry to record amortization expense related to the trademark at December 31, Y6.
- The trademarks fair value at December 31, Y6 is $2,190,000. Prepare the journal entry, if any, to record the increase in value.
- Centralia follows ASPE – repeat the requirements in part 1 since Centralia follows ASPE.
Exercise 11.19
On January 1, Y3, MVR Corporation purchased the net assets of LDL Limited. MVR paid $546,000 for LDL’s net assets which had a fair value of $356,900.
Information relating to goodwill is as follows:
| Y4 undiscounted future cash flows | $175,400 |
| Y4 value in use | $168,960 |
| Y4 fair value | $164,230 |
| Y5 fair value | $206,520 |
Required:
- Calculate the amount of goodwill relating to this transaction.
- Assume MVR follows IFRS:
- Prepare the journal entry, if any at December 31, Y4 relating to impairment.
- Prepare the journal entry, if any at December 31, Y5 relating to impairment.
- Assume MVR follows ASPE:
- Prepare the journal entry, if any at December 31, Y4 relating to impairment.
- Prepare the journal entry, if any at December 31, Y5 relating to impairment.
