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Exam 7: Long-Term Assets

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Question 21

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Bio-Lab Pharmaceuticals carried on a project to develop a new drug that dramatically shortened the recovery period for flu infection. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project developing a kind of shot that achieves the same goal for flu recovery, and the company is confident in gaining FDA approval for the new shot and in making profits out of the shot. What amount would be expensed?

A) $0.
B) $150,000.
C) $300,000.
D) $450,000.

E) B) and D)
F) B) and C)

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Question 22

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The return on assets is calculated as:

A) Net Income divided by total assets.
B) Net Income divided by average total assets.
C) Net Income divided by ending total assets.
D) Ending total assets divided by net income.

E) A) and B)
F) B) and C)

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Question 23

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International accounting standards allow firms to record development costs that benefit future periods as an intangible asset.

At the beginning of the year, Big Time Tires acquired 100% of the common stock of Discount Tires. The purchase price allocation included the following items: $800,000, patent; $300,000, trademark considered to have an indefinite useful life; and $2 million, goodwill. Big Time Tire's policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Big Time Tire's income statement for the first year related to these items?

C-Stop reports the following information at year-end: $\begin{array} { | l | r | r | r | } \hline & { \text { Estimated } } & \\& { \text { Book Value } } & \text { Cash Flows } & { \text { Fair Value } } \\\hline \text { Building } & \$ 500,000 & \$ 380,000 & \$ 360,000 \\\hline \text { Patent } & \$ 35,000 & \$ 40,000 & \$ 38,000 \\\hline \text { Copyright } & \$ 40,000 & \$ 38,000 & \$ 39,000 \\\hline \text { Machine } & \$ 100,000 & \$ 120,000 & \$ 85,000 \\\hline\end{array}$ Based on the above information, what is the total amount of impairment loss that C-Stop should record at year end?

Northern purchased the entire business of Southern including all its assets and liabilities for $600,000. Below is information related to the two companies: $\begin{array}{lrr}&\text { Northern }&\text {Southern }\\\text { Fair value of assets } & 1,050,000 & 800,000 \\\text { Fair value of liabilities } & 575,000 & 300,000 \\\text { Reported assets } & 800,000 & 650,000 \\\text { Reported liabilities } & 500,000 & 250,000 \\\text { Net Income for the year } & 60,000 & 50,000\end{array}$ How much goodwill did Northern pay for acquiring Southern?

Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Determine the amount Soccer Wholesale should record as the cost of the land.

In testing for recoverability of an operational asset, an impairment loss is required if the:

Goodwill is:

Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500, property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?

With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life.

Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?

Most of the costs associated with internally developed intangible assets are recorded as intangible assets on the balance sheet.

Using the double-declining balance method, the book value at December 31, 2013 would be:

Berry Co. purchases a patent on January 1, 2012, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the carrying value of the patent on December 31, 2013?

Which of the following is considered a "contra" account?

Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense.

On January 1, 2012, The Donut Stop purchased a patent for $80,000. The remaining legal life is 20 years, but the company estimates the patent will be useful for only five more years. In January 2013, the company incurred legal fees of $25,000 in successfully defending a patent infringement suit. The successful defense did not change the company's estimate of useful life. The Donut Stop's year end is December 31^st. Record the purchase and amortization in 2012 and the legal fees and amortization in 2013. What is the balance in the Patents account at the end of 2013?

When a firm develops a trademark internally through advertising, it does not record the advertising costs as an intangible asset, but rather expenses them in the income statement.

Which of the following subsequent expenditures would be capitalized?