CHAPTER 12

Intangible Assets

ANSWERS TO QUESTIONS
1. The two main characteristics of intangible assets are:
(a) they lack physical substance.
(b) they are not a financial instrument.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

2. If intangibles are acquired for stock, the cost of the intangible is the fair value of the consideration
given or the fair value of the consideration received, whichever is more clearly evident.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

3. Limited-life intangibles should be amortized by systematic charges to expense over their useful
life. An intangible asset with an indefinite life is not amortized.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

4. When intangibles are created internally, it is often difficult to determine the validity of any future
service potential. To permit deferral of these types of costs would lead to a great deal of subject-
tivity because management could argue that almost any expense could be capitalized on the basis
that it will increase future benefits. The cost of purchased intangibles, however, is capitalized
because its cost can be objectively verified and reflects its fair value at the date of acquisition.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

5. Companies cannot capitalize self-developed, self-maintained, or self-created goodwill. These expen-

ditures would most likely be reported as selling expenses.

LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

6. Factors to be considered in determining useful life are:

(a) The expected use of the asset by the entity.
(b) The expected useful life of another asset or a group of assets to which the useful life of the
intangible asset may relate.
(c) Any legal, regulatory, or contractual provisions that may limit useful life.
(d) Any legal, regulatory or contractual provisions that enable renewal or extension of the asset’s
legal or contractual life without substantial cost.
(e) The effects of obsolescence, demand, competition, and other economic factors.
(f) The level of maintenance expenditure required to obtain the expected future cash flows from
the asset.

LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

7. The amount of amortization expensed for a limited-life intangible asset should reflect the pattern in
which the asset is consumed or used up, if that pattern can be reliably determined. If the pattern of
production or consumption cannot be determined, the straight-line method of amortization should
be used.

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8. This trademark is an indefinite life intangible and, therefore, should not be amortized.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication

Questions Chapter 12 (Continued)

9. The $190,000 should be expensed as research and development expense in 2020. The $91,000 is
expensed as selling and promotion expense in 2020. The $45,000 of costs to legally obtain the
patent should be capitalized and amortized over the useful or legal life of the patent, whichever is
shorter.

LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

10. Amortization Expense .................................................................... 35,000

Patents (or Accumulated Patent Amortization) ......................... 35,000

Straight-line amortization is used because the pattern of use cannot be reliably determined.

LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

11. Artistic-related intangible assets involve ownership rights to plays, pictures, photographs, and
video and audiovisual material. These ownership rights are protected by copyrights. Contract-related
intangible assets represent the value of rights that arise from contractual arrangements. Examples
are franchise and licensing agreements, construction permits, broadcast rights, and service or
supply contracts.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

12. Varying approaches are used to define goodwill. They are:

(a) Goodwill should be measured initially as the excess of the fair value of the acquisition cost
over the fair value of the net assets acquired. This definition is a measurement definition but
does not conceptually define goodwill.
(b) Goodwill is sometimes defined as one or more unidentified intangible assets and identifiable
intangible assets that are not reliably measurable. Examples of elements of goodwill include
new channels of distribution, synergies of combining sales forces, and a superior manage-
ment team.
(c) Goodwill may also be defined as the intrinsic value that a business has acquired beyond the
mere value of its net assets whether due to the personality of those conducting it, the nature
of its location, its reputation, or any other circumstance incidental to the business and tending
to make it permanent. Another definition is the capitalized value of the excess of estimated
future profits of a business over the rate of return on capital considered normal in the industry.

A bargain purchase (or negative goodwill) occurs when the fair value of the assets purchased is
higher than the cost. This situation may develop from a market imperfection. In this case, the seller
would have been better off to sell the assets individually than in total. However, situations do occur
(e.g., a forced liquidation or distressed sale due to the death of the company founder), in which the
purchase price is less than the value of the identifiable net assets.

LO: 3, Bloom: K, Difficulty: Moderate, Time: 5-10, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC:
Communication

13. Goodwill is recorded only when it is acquired by purchase. Goodwill acquired in a business
combination is considered to have an indefinite life and therefore should not be amortized, but
should be tested for impairment on at least an annual basis.

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Questions Chapter 12 (Continued)

14. Many analysts believe that the value of goodwill is so subjective that it should not be given the
same status as other types of assets such as cash, receivables, inventory, etc. The analysts are
simply stating that they believe that presentation of goodwill on the balance sheet does not provide
any useful information to the users of financial statements. Whether this is true or not is a difficult
point to prove, but it should be noted that it appears contradictory to pay for the goodwill and then
immediately write it off, denying that it has any value.

LO: 3, 18, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

15. Accounting standards require that if events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable, then the carrying amount of the asset should be
assessed. The assessment or review takes the form of a recoverability test that compares the sum
of the expected future cash flows from the asset (undiscounted) to the carrying amount. If the cash
flows are less than the carrying amount, the asset has been impaired. The impairment loss is
measured as the amount by which the carrying amount exceeds the fair value of the asset. The
fair value of assets is measured by their fair value if an active market for them exists. If no market
price is available, the present value of the expected future net cash flows from the asset may be
used.

LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

16. Under U.S. GAAP, impairment losses on assets held for use may not be restored.

LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

17. Impairment losses are reported as part of income from continuing operations, generally in the
“Other expenses and losses” section. Impairment losses (and recovery of losses for assets to be
disposed of) are similar to other costs that would flow through operations. Thus, gains (recoveries
of losses) on assets to be disposed of should be reported as part of income from continuing
operations.

LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

18. The amount of goodwill impaired is $40,000, computed as follows:

Carrying value of net assets ................................. $1,490,000
Fair value of reporting unit .................................... (1,450,000)
Impaired goodwill.................................................. $ 40,000

LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, None

19. Research and development costs are incurred to develop new products or processes, to improve
present products, or to discover new knowledge. R&D expenditures present problems of
(1) identifying the costs associated with particular activities, projects, or achievements, and
(2) determining the magnitude of the future benefits and the length of time over which such
benefits may be realized. R&D activities may incur costs classified as follows:
(a) materials, equipment, and facilities,
(b) personnel,
(c) purchased intangibles,
(d) contract services, and
(e) indirect costs.

LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-3
Questions Chapter 12 (Continued)

20. (a) Personnel (labor) type costs incurred in R&D activities should be expensed as incurred.
(b) Materials and equipment costs should be expensed immediately unless the items have
alternative future uses. If the items have alternative future uses, the materials should be
recorded as inventories and allocated as consumed and the equipment should be capitalized
and depreciated as used.
(c) Indirect costs of R&D activities should be reasonably allocated to R&D (except for general and
administrative costs, which must be clearly related to be included) and expensed.

LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

21. (a) Expense as R&D.

(b) Expense as R&D.
(c) Capitalize as patent and/or license and amortize.
Also, see Illustration 12-14 (page 22).

LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

22. Each of these items should be charged to current operations. Advertising costs have some minor
exceptions to this general rule. However, the specific accounting is beyond the scope of this
textbook.

LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

23. $585,000 ($400,000 + $60,000 + $125,000).

LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

24. These costs are referred to as start-up costs, or more specifically organizational costs in this case.
The accounting for start-up costs is straightforward—expense these costs as incurred. The
profession recognizes that these costs are incurred with the expectation that future revenues will
occur or increased efficiencies will result. However, to determine the amount and timing of future
benefits is so difficult that a conservative approach—expensing these costs as incurred—is
required.

LO: 4, 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

25. The total life, per revised facts, is 40 years (10 + 30). There are 30 (40 – 10) remaining years for
$540,000
amortization purposes. Original amortization: = $18,000 per year; $18,000 X 10 years
30
expired = $180,000 accumulated amortization.

$540,000 original cost

–180,000 accumulated amortization
$360,000 remaining cost to amortize

$360,000 ÷ 30 years = $12,000 amortization for 2020 and years thereafter.

LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

12-4 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 12.1

Patents ............................................................................. 54,000

Cash ........................................................................ 54,000

Amortization Expense ..................................................... 5,400

Patents ($54,000 X 1/10 = $5,400) .......................... 5,400

LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.2

Patents ............................................................................. 24,000

Cash ........................................................................ 24,000

Amortization Expense ..................................................... 8,400

Patents [($43,200 + $24,000) X 1/8 = $8,400] ........... 8,400

LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.3

Trade Names.................................................................... 68,000

Cash ........................................................................ 68,000

Amortization Expense ..................................................... 8,500

Trade Names ($68,000 X 1/8 = $8,500) .................. 8,500
LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.4

Franchises ....................................................................... 120,000

Cash ........................................................................ 120,000

Amortization Expense ..................................................... 11,250

Franchises ($120,000 X 1/8 X 9/12 = $11,250) ....... 11,250
LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-5
BRIEF EXERCISE 12.5

Purchase price.............................................................. $700,000

Fair value of assets ...................................................... $800,000
Fair value of liabilities .................................................. 200,000
Fair value of net assets ................................................ 600,000
Value assigned to goodwill.......................................... $100,000
LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.6

Loss on Impairment ........................................................ 190,000

Patents ($300,000 – $110,000) ............................... 190,000

Note: An impairment has occurred because expected net future cash flows
($210,000) are less than the carrying amount ($300,000). The loss is measured
as the difference between the carrying amount and fair value ($110,000).
LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.7

Because the fair value of the division exceeds the carrying amount of the
assets, goodwill is not considered to be impaired. No entry is necessary.
LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Reflecting Thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication

BRIEF EXERCISE 12.8

Loss on Impairment ($800,000 – $750,000).................... 50,000

Goodwill .................................................................. 50,000

The fair value of the reporting unit ($750,000) is less than the carrying value
($800,000)—an impairment has occurred. The loss is the difference between
the recorded net assets of $800,000 and the fair value of $750,000.
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12-6 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
BRIEF EXERCISE 12.9

Carrying Life in Amortization Months

Amount Months Per Month Amortization
Patent (1/1/20) $288,000 96 $3,000 12
Legal costs (12/1/20) 85,000 85 $1,000 1
$373,000

Carrying amount ...................................................... $373,000

Less: Amortization of patent (12 X $3,000) ............ (36,000)
Legal costs amortization (1 X $1,000) ......... (1,000)
Carrying amount 12/31/20 ........................................ $336,000
LO: 1, 2, 5, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.10

Copyright No. 1 for $9,900 should be expensed and therefore not reported
on the balance sheet.

Copyright No. 2 for $24,000 should be capitalized. Because the useful life is
indefinite, copyright No. 2 should be tested at least annually for impairment
using a fair value test. It would be reflected on the December 31,
2020balance sheet at its cost of $24,000.
LO: 1, 2, 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

BRIEF EXERCISE 12.11

Organization Expense ..................................................... 60,000

Cash ........................................................................ 60,000

LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

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BRIEF EXERCISE 12.12

Research and Development Expense ............................ 430,000

Cash ........................................................................ 430,000
LO: 5, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

BRIEF EXERCISE 12.13

(a) Capitalize
(b) Expense
(c) Expense
(d) Expense
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12-8 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO EXERCISES
EXERCISE 12.1 (15–20 minutes)

(a) 10, 13, 15, 16, 17, 19, 23

(b) 1. Long-term investments in the balance sheet.

2. Property, plant, and equipment in the balance sheet.
3. Research and development expense in the income statement.
4. Current asset (prepaid rent) in the balance sheet.
5. Property, plant, and equipment in the balance sheet.
6. Research and development expense in the income statement.
7. Charge as expense in the income statement.
8. Operating losses in the income statement.
9. Charge as expense in the income statement.
11. Not recorded; any costs related to creating goodwill incurred
internally must be expensed.
12. Research and development expense in the income statement.
14. Research and development expense in the income statement.
18. Research and development expense in the income statement.
20. Research and development expense in the income statement.
21. Long-term investments, or other assets, in the balance sheet.
22. Expensed in the income statement.
LO: 1, 2, Bloom: AN, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 12.2 (10–15 minutes)

The following items would be classified as intangible assets:

Cable television franchises Film contract rights
Music copyrights Customer lists
Goodwill Covenants not to compete
Internet domain name Brand names

Cash, accounts receivable, notes receivable, and prepaid expenses would

be classified as current assets on the balance sheet.

Property, plant, and equipment, and land would be classified as non-

current assets in the property, plant, and equipment section on the balance
sheet.

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EXERCISE 12.2 (Continued)

Investments in affiliated companies would be classified as part of the

investments section of the balance sheet.
Research and development costs would be classified as operating
expenses on the income statement.
Discount on notes payable is shown as a deduction from the related notes
payable in the liabilities section on the balance sheet.

Organization costs are start-up costs and should be expensed as incurred

and reported in income.
LO: 1, 2, Bloom: AN, Difficulty: Simple, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

EXERCISE 12.3 (10–15 minutes)

(a) Trademarks $15,000

Excess of cost over fair value of net identifiable
assets of acquired subsidiary (goodwill) 75,000
Total intangible assets $90,000

(b) Organization costs, $24,000, should be expensed.

Discount on bonds payable, $35,000, should be reported as a contra

account to bonds payable in the long-term liabilities section on the
balance sheet.

Deposits with advertising agency for ads to promote goodwill of

company, $10,000, should be reported either as an expense or as
prepaid advertising in the current assets section of the balance sheet.
Advertising costs in general are expensed when incurred or when
first used.

Cost of equipment acquired for research and development projects,

$90,000, should be reported with property, plant, and equipment, on
the balance sheet because the equipment has an alternative use.

Costs of developing a secret formula for a product that is expected to

be marketed for at least 20 years, $80,000, should be classified as
research and development expense on the income statement.
LO: 1, 2, Bloom: AN, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

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EXERCISE 12.4 (15–20 minutes)

1. Alatorre should report the patent at $600,000 ($1,000,000 cost net of

$400,000 accumulated amortization) on the balance sheet. The
computation of accumulated amortization is as follows.

Amortization for 2018 and 2019 ($1,000,000/10) X 2 $200,000

2020 amortization: ($1,000,000 – $200,000) ÷ (6 – 2) 200,000
Accumulated amortization, 12/31/20 $400,000

2. Alatorre should amortize the franchise over its estimated useful life.
Because it is uncertain that Alatorre will be able to retain the franchise
at the end of 2028, it should be amortized over 10 years. The amount of
amortization on the franchise for the year ended December 31, 2020, is
$40,000: ($400,000/10).

3. These costs should be expensed as incurred. Therefore $275,000 of

organization expense is reported in income for 2020.

4. Because the license can be easily renewed (at nominal cost), it has an
indefinite life. Thus, no amortization will be recorded. The license will
be tested for impairment in future periods.
LO: 1, 2, 5, Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

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EXERCISE 12.5 (15–20 minutes)

Research and Development Expense ............................. 940,000

Patents .............................................................................. 75,000
Rent Expense [(5 ÷ 7) X $91,000] ..................................... 65,000
Prepaid Rent [(2 ÷ 7) X $91,000]....................................... 26,000
Advertising Expense ........................................................ 207,000
Retained Earnings ............................................................ 241,000
Discount on Bonds Payable ............................................ 82,950*
Interest Expense ............................................................... 1,050
Paid in Capital in Excess of Par on Common Stock ..... 250,000
Intangible Assets ....................................................... 1,388,000

*84,000 ÷ 240 months = $350; $350 X 3 = $1,050; $84,000 – $1,050 = $82,950

Amortization Expense [($75,000 ÷ 10) X 1/2] ................. 3,750

Patents (or Accumulated Amortization) 3,750
LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 12.6 (15–20 minutes)

Patents ............................................................................. 350,000

Goodwill ........................................................................... 360,000
Franchise ......................................................................... 450,000
Copyright ......................................................................... 156,000
Research and Development Expense ............................ 215,000
Intangible Assets.................................................... 1,531,000

Amortization Expense ..................................................... 79,250

Patents ($350,000/8) ............................................... 43,750
Franchise ($450,000/10 X 6/12) .............................. 22,500
Copyright ($156,000/5 X 5/12) ................................ 13,000

Balance of Intangible Assets as of December 31, 2020

Patents = $350,000 – $43,750 = $306,250
Goodwill = $360,000 (no amortization)
Franchise = $450,000 – $22,500 = $427,500
Copyright = $156,000 – $13,000 = $143,000
LO: 1, 5, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

12-12 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 12.7 (10–15 minutes)

(a) 2019 amortization: $16,000 ÷ 10 = $1,600.

12/31/19 book value: $16,000 – $1,600 = $14,400.

2020 amortization: ($14,400 + $7,800) ÷ 9 = $2,467.

12/31/20 book value: ($14,400 + $7,800 – $2,467) = $19,733.

(b) 2020 amortization: ($14,400 + $7,800) ÷ 4 = $5,550.

12/31/20 book value: $14,400 + $7,800 – $5,550 = $16,650.

(c) Carrying amount ($19,733) > future cash flows ($16,000); thus the
trade name fails the recoverability test. The new carrying value is
$15,000—the trade name’s fair value.

2021 amortization (after recording impairment loss):

$15,000 ÷ 8 = $1,875.
12/31/21 book value: $15,000 – $1,875 = $13,125.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-13
EXERCISE 12.8 (15–20 minutes)

(a) CARTER COMPANY

Intangibles Section of Balance Sheet
December 31, 2020
Patent from Ford Company, net of accumulated
amortization of $560,000 (Schedule 1) $1,440,000
Franchise from Polo Company, net of accumulated
amortization of $48,000 (Schedule 2) 432,000
Total intangibles $1,872,000

Schedule 1 Computation of Patent from Ford Company

Cost of patent at date of purchase $2,000,000
Amortization of patent for 2019 ($2,000,000 ÷ 10 years) (200,000)
1,800,000
Amortization of patent for 2020 ($1,800,000 ÷ 5 years) (360,000)
Patent balance $1,440,000

Schedule 2 Computation of Franchise from Polo Company

Cost of franchise at date of purchase $ 480,000
Amortization of franchise for 2020 ($480,000 ÷ 10) (48,000)
Franchise balance $ 432,000

(b) CARTER COMPANY

Income Statement Effect
For the year ended December 31, 2020
Patent from Ford Company:
Amortization of patent for 2020
($1,800,000 ÷ 5 years) $360,000
Franchise from Polo Company:
Amortization of franchise for 2020
($480,000 ÷ 10) $ 48,000
Payment to Polo Company
($2,500,000 X 5%) 125,000 173,000
Research and development costs 433,000
Total charged against income $966,000
LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

12-14 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 12.9 (20–25 minutes)

(a) 2016 Research and Development Expense ............................ 170,000

Cash ........................................................................ 170,000

Patents .............................................................................
18,000
Cash ........................................................................ 18,000

Amortization Expense .....................................................

450
Patents [($18,000 ÷ 10) X 3/12] ............................... 450

2017 Amortization Expense .....................................................

1,800
Patents ($18,000 ÷ 10) ............................................ 1,800

(b) 2018 Patents .............................................................................

9,480
Cash ........................................................................ 9,480

Amortization Expense .....................................................

1,940
Patents ($750* + $1,190**) ...................................... 1,940
*Jan. 1–June 1: ($18,000 ÷ 10) X
5/12 = $750
**June 1–Dec. 31: ($18,000 – $450 –
$1,800 – $750 + $9,480) = $24,480;
($24,480 ÷ 12) X 7/12 = $1,190

2019 Amortization Expense .....................................................

2,040
Patents ($24,480 ÷ 12) ............................................ 2,040

(c) 2020 and 2021

Amortization Expense .....................................................
10,625
Patents ($21,250 ÷ 2) .............................................. 10,625
($24,480 – $1,190 – $2,040) = $21,250
LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-15
EXERCISE 12.10 (15–20 minutes)

(a) Patent A
Life in years 17
Life in months (12 X 17) 204
Amortization per month ($30,600 ÷ 204) $150
Number of months amortized to date
Year Month
2016 10
2017 12
2018 12
2019 12
46

Carrying amount 12/31/19 $23,700: ($30,600 – [46 X $150])

Patent B
Life in years 10
Life in months (12 X 10) 120
Amortization per month ($15,000 ÷ 120) $125
Number of months amortized to date
Year Month
2017 6
2018 12
2019 12
30

Carrying amount 12/31/19 $11,250: ($15,000 – [$125 X 30])

Patent C
Life in years 4
Life in months (12 X 4) 48
Amortization per month ($14,400 ÷ 48) $300
Number of months amortized to date
Year Month
2018 4
2019 12
16

Carrying amount 12/31/19 $9,600: ($14,400 – [$300 X 16])

12-16 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 12.10 (Continued)

At December 31, 2019

Patent A $23,700
Patent B 11,250
Patent C 9,600
Total $44,550

(b) Analysis of 2020 transactions

1. The $245,700 incurred for research and development should be

expensed.

2. The book value of Patent B is $9,750 ($11,250-$1,500) and its

estimated future cash flows are $6,000: (3 X $2,000); therefore
Patent B is impaired. The impairment loss is imputed as follows:

Book value $9,750

Less: Present value of future
cash flows ($2,000 X 2.57710) 5,154
Loss recognized $ 4,596

Patent B carrying amount (12/31/20) $5,154

At December 31, 2020

Patent A $21,900 ($23,700 – [12 X $150])
Patent B 5,154 (Present value of future cash flows)
Patent C 6,000 ($9,600 – [12 X $300])
Patent D 34,560 ($36,480 – $1,920*)
Total $67,614

Patent D amortization
Life in years 9 1/2
Life in months 114
Amortization per month ($36,480 ÷ 114) $320
$320 X 6 = $1,920
LO: 1, 2, 4, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-17
EXERCISE 12.11 (20–25 minutes)

Net assets of Zweifel as reported ($575,000 – $350,000) $225,000

Adjustments to fair value
Increase in land value 30,000
Decrease in equipment value (5,000) 25,000
Net assets of Zweifel at fair value 250,000
Selling price 350,000
Amount of goodwill to be recorded $100,000

The journal entry to record this transaction is as follows:

Cash ............................................................................... 100,000

Land................................................................................ 100,000
Building .......................................................................... 200,000
Equipment ...................................................................... 170,000
Copyright ....................................................................... 30,000
Goodwill ......................................................................... 100,000
Accounts Payable ................................................ 50,000
Long-term Notes Payable .................................... 300,000
Cash ...................................................................... 350,000
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 12.12 (10–15 minutes)

(a) Cash .................................................................................

50,000
Receivables .....................................................................
90,000
Inventory ..........................................................................
125,000
Land .................................................................................
60,000
Buildings..........................................................................
75,000
Equipment .......................................................................
70,000
Trademark........................................................................
15,000
Goodwill ...........................................................................
65,000*
Accounts Payable .................................................. 200,000
Notes Payable ........................................................ 100,000
Cash ........................................................................ 250,000
*$350,000 – [$235,000 + $20,000 + $25,000 + $5,000]

Note that the building and equipment would be recorded at the

7/1/20cost to Brigham; accumulated depreciation accounts would not
be recorded.

12-18 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 12.12 (Continued)

(b) Amortization Expense ....................................................

1,500
Trademarks ([$15,000 – $3,000] X 1/4 X 6/12) ............ 1,500
LO: 1, 2, 3, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 12.13 (15–20 minutes)

(a) December 31, 2020

Loss on Impairment ......................................... 1,100,000*
Copyrights ............................................... 1,100,000

*Carrying amount $4,300,000

Fair value 3,200,000
Loss on impairment $1,100,000

Note: Asset fails recoverability test because the expected net cash flows of
$4,000,000 are less than the carrying value of $4,300,000.

(b) Amortization Expense ..................................... 320,000*

Copyrights ............................................... 320,000

*New carrying amount $3,200,000

Useful life ÷ 10 years
Amortization per year $ 320,000

(c) No entry is necessary. Restoration of any impairment loss is not

permitted for assets held for use.
LO: 4, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

EXERCISE 12.14 (15–20 minutes)

(a) December 31, 2020

Loss on Impairment .............................. 15,000,000*
Goodwill ....................................... 15,000,000
*$350,000,000 − $335,000,000,

The fair value of the reporting unit ($335 million) is below its carrying value
($350 million). Therefore, an impairment has occurred.

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-19
EXERCISE 12.14 (Continued)

(b) No entry necessary. After a goodwill impairment loss is recognized,

the adjusted carrying amount of the goodwill is its new accounting
basis. Subsequent reversal of previously recognized impairment
losses is not permitted under FASB ASC 350-30-35.

Note to instructor: It is important that before conducting the goodwill

impairment test that all other long-lived assets are evaluated and adjusted
for any impairments.
LO: 3, 4, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

EXERCISE 12.15 (10–15 minutes)

(a) Attorney’s fees in connection with organization

of the company $15,000
Costs of meetings of incorporators to discuss
organizational activities 7,000
State filing fees to incorporate 1,000
Total organization costs $23,000

Drafting and design equipment, $10,000, should be classified as part of

fixed assets, rather than as organization costs.

(b) Organization Expense.....................................................

23,000
Cash (Payables) ..................................................... 23,000
LO: 5, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

EXERCISE 12.16 (15–20 minutes)

(a) In accordance with GAAP, the $325,000 is a research and

development cost that should be charged to R & D Expense and, if
not separately disclosed in the income statement, the total cost of
R & D should be separately disclosed in the notes to the financial
statements.

12-20 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
EXERCISE 12.16 (Continued)

(b) Research and Development Expense ............................

110,000
Cash, Accts. Payable, etc. ..................................... 110,000
(To record research and
development costs)

Patents .............................................................................
16,000
Cash, Accts. Payable, etc. ..................................... 16,000
(To record legal and administrative
costs incurred to obtain patent
#472-1001-84)

Amortization Expense .................................................... 3,200

Patents.................................................................... 3,200
[To record one year’s amortization
expense ($16,000 ÷ 5 = $3,200)]

(c) Patents .............................................................................

47,200
Cash, Accts. Payable, etc. ..................................... 47,200
(To record legal cost of successfully
defending patent)

The cost of defending the patent is capitalized because the defense

was successful and because it extended the useful life of the patent.

Amortization Expense .................................................... 7,500

Patents.................................................................... 7,500
(To record one year’s amortization
Expense:
$16,000 – $3,200 = $12,800;
$12,800 ÷ 8 = $1,600
$47,200 ÷ 8 = 5,900
Amortization expense for 2018 $7,500

(d) Additional engineering and consulting costs required to advance the

design of a product to the manufacturing stage are R & D costs. As
indicated in the chapter it is R &D because it translates knowledge
into a plan or design for a new product.
LO: 2, 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-21
EXERCISE 12.17 (10–15 minutes)

Depreciation of equipment acquired that will have alternate

uses in future research and development projects over
the next 5 years ($280,000 ÷ 5) $ 56,000
Materials consumed in research and development projects 59,000
Consulting fees paid to outsiders for research and
development projects 100,000
Personnel costs of persons involved in research and
development projects 128,000

Indirect costs reasonably allocable to research and

development projects 50,000
Total to be expensed for research and
development $393,000*

*Materials purchased for future R&D projects should be reported as an asset.

LO: 5, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

12-22 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 SOLUTIONS TO PROBLEMS

PROBLEM 12.1

Franchises ..................................................................... 48,000

Prepaid Rent .................................................................. 24,000
Retained Earnings (Net loss) ........................................ 16,000
Patents ($84,000 + $12,650) .......................................... 96,650
Research and Development Expense
($75,000 + $160,000) ................................................... 235,000
Goodwill ......................................................................... 278,400
Intangible Assets ................................................. 698,050

Amortization Expense ($48,000 ÷ 8) ............................. 6,000

Retained Earnings ($48,000 ÷ 8 X 6/12)........................ 3,000
Franchises ............................................................ 9,000

Rent Expense ($24,000 ÷ 2) .......................................... 12,000

Retained Earnings ($24,000 ÷ 2 X 3/12)........................ 3,000
Prepaid Rent ......................................................... 15,000

Amortization Expense ................................................... 9,170

Patents
($84,000 ÷ 10) + ($12,650 X 7/115) .................... 9,170

Balances at 12/31/21

Prepaid Rent ($24,000 – $15,000) ................................. $ 9,000

Franchises ($48,000 – 9,000) ........................................ 39,000
Patents ($96,650 – 9,170) .............................................. 87,480
Goodwill ......................................................................... 278,400

Note: No amortization of goodwill; goodwill should be tested for impairment

on at least an annual basis in future periods.
LO: 1, 2, 3, 4, Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-23
 PROBLEM 12.2

(a) Costs to obtain patent Jan. 2014 ................... $59,500

2014 amortization ($59,500 ÷ 17) .................... (3,500)
Carrying value, 12/31/14 ................................. $56,000

All costs incurred prior to January 2014 are related to research and
development activities and were expensed as incurred in accordance
with GAAP.

(b) 1/1/15 carrying value of patent ....................................... $56,000

2015 amortization ($59,500 ÷ 17) .................................... $3,500
2016 amortization ............................................................
3,500 (7,000)
49,000
Legal fees to defend patent 12/16 .................................. 42,000
Carrying value, 12/31/16 ................................................. 91,000
2017 amortization ($91,000 ÷ 14) .................................... 6,500
2018 amortization ............................................................
6,500 (13,000)
Carrying value, 12/31/18 ................................................. $78,000

The costs incurred in 2015 and 2017 are related to research and
development activities and are expensed as incurred.

(c) 1/1/19 carrying value ....................................................... $78,000

2019 amortization ($78,000 ÷ 5) ......................................$15,600
2020 amortization ............................................................
15,600
2021 amortization ............................................................
15,600 (46,800)
Carrying value, 12/31/21 ................................................. $31,200

The legal costs in 2021 were expensed because the suit was
unsuccessful.
LO: 1, 2, 4, 5, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

12-24 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 12.3

(a) SANDRO CORPORATION

Intangible Assets
December 31, 2020
Franchise, net of accumulated amortization of $5,870
(Schedule 1) ............................................................................... $ 52,830
Patent, net of accumulated amortization of $2,200
(Schedule 2) ............................................................................... 15,400
Trademark, net of accumulated amortization of $6,600
(Schedule 3) ............................................................................... 39,600
Total intangible assets ........................................................ $107,830

Schedule 1 Franchise
Cost of franchise on 1/1/20 ($15,000 + $43,700).......................... $ 58,700
2020 amortization ($58,700 X 1/10) .............................................. (5,870)
Cost of franchise, net of amortization................................ $ 52,830

Schedule 2 Patent
Cost of securing patent on 1/2/20 ................................................ $ 17,600
2020 amortization ($17,600 X 1/8) ................................................ (2,200)
Cost of patent, net of amortization ..................................... $ 15,400

Schedule 3 Trademark
Cost of trademark on 7/1/17 ......................................................... $ 36,000
Amortization, 7/1/17 to 7/1/20 ($36,000 X 3/20)............................ (5,400)
Book value on 7/1/20 .................................................................... 30,600
Cost of successful legal defense on 7/1/20................................. 10,200
Book value after legal defense..................................................... 40,800
Amortization, 7/1/20 to 12/31/20 ($40,800 X 1/17 X 6/12) ............ (1,200)
Cost of trademark, net of amortization .............................. $ 39,600

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-25
PROBLEM 12.3 (Continued)

(b) SANDRO CORPORATION

Expenses Resulting from Selected Intangible Assets Transactions
For the Year Ended December 31, 2020
Interest expense ($43,700 X 14%) ............................................... $ 6,118
Franchise amortization (Schedule 1) .......................................... 5,870
Franchise fee ($900,000 X 5%) .................................................... 45,000
Patent amortization (Schedule 2) ................................................ 2,200
Trademark amortization (Schedule 4)......................................... 2,100
Total intangible assets ....................................................... $61,288

Note: The $65,000 of research and development costs incurred in developing

the patent would have been expensed prior to 2020.

Schedule 4 Trademark Amortization

Amortization, 1/1/20 to 6/30/20 ($36,000 X 1/20 X 6/12) ............... $ 900
Amortization, 7/1/20 to 12/31/20 ($40,800 X 1/17 X 6/12) ............. 1,200
Total trademark amortization .............................................. $ 2,100
LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

12-26 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 12.4

(a) Goodwill = Excess of the cost of the division over the fair value of the
identifiable assets:

$3,000,000 – $2,750,000 = $250,000

(b) No impairment loss is recorded, because the fair value of Conchita

($1,850,000) is greater than carrying value of the net assets ($1,650,000).

(c) Computation of impairment:

Impaired goodwill = Fair value of division less the carrying value of the
division (adjusted for fair value changes), including goodwill:

Fair value of Conchita division .................... $1,600,000

Carrying value of division (1,650,000)
Impairment loss ............................................ ($ 50,000)

(d) Loss on Impairment ...................................... 50,000

Goodwill ...................................................................... 50,000

This loss will be reported in income as a separate line item before the
subtotal “income from continuing operations.”
LO: 3, 4, 5, Bloom: AP, Complex, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC: None

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-27
 PROBLEM 12.5

(a) MONTANA MATT’S GOLF INC.

Intangibles Section of Balance Sheet
December 31, 2019
Trade name ..................................................................................... $ 10,000
Copyright (net accumulated amortization of $300)
(Schedule 1) ................................................................................. 23,700
Goodwill (Schedule 2) .................................................................... 170,000
Total intangibles............................................................................. $203,700

Schedule 1 Computation of Value of Old Master Copyright

Cost of copyright at date of purchase .......................................... $ 24,000
Amortization of copyright for 2019 (300)
[($24,000 ÷ 40) X 1/2 year] ................................................................
Carrying value of copyright at December 31 ...................... $ 23,700

Schedule 2 Goodwill Measurement

Purchase price ......................................................... $770,000
Fair value of assets .................................................. $800,000
Fair value of liabilities .............................................. (200,000)
Fair value of net assets .................................. (600,000)
Value assigned to goodwill ..................................... $170,000

Amortization expense for 2019 is $300 (see Schedule 1). There is no amor-
tization for the goodwill or the trade name, both of which are considered
indefinite life intangible assets.

(b) Amortization Expense .......................................... 600

Copyrights ($24,000 ÷ 40) ................................. 600

There is a full year of amortization on the Copyright. There is no amortiz-

ation for the goodwill or the trade name, which are considered indefinite
life intangibles.

12-28 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
PROBLEM 12.5 (Continued)

MONTANA MATT’S GOLF INC.

Intangibles Section of Balance Sheet
December 31, 2020
Trade name...................................................................................... $ 10,000
Copyright (net of accumulated amortization, $900)
(Schedule 1) ................................................................................. 23,100
Goodwill ......................................................................................... 170,000
Total intangibles ............................................................................. $203,100

Schedule 1 Computation of Value of Old Master Copyright

Cost of Copyright at date of purchase .......................................... $ 24,000
Amortization of Copyright for 2019, 2020
[($24,000 ÷ 40) X 1.5 years] .......................................................... (900)
Balance of copyright at December 31 .................................. $ 23,100

(c) Loss on Impairment .................................................... 87,000

Goodwill ................................................................... 80,000
Trade names ($10,000 – $3,000) .............................. 7,000

*Fair value of Old Master reporting unit .......... $420,000

Net identifiable assets (including goodwill) .. (500,000)
Goodwill impairment loss ............................... $ 80,000

The Goodwill is considered impaired because the fair value of the business
unit ($420,000) is less than its carrying value ($500,000). The copyright is not
considered impaired because the expected net future cash flows ($30,000)
exceed the carrying amount [$22,500 ($23,100 − $600)].
LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Time: 30-35, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 12-29
 PROBLEM 12.6

(a) Income statement items and amounts for the year ended December 31,
2020:

Research and development expenses* .......................... $288,000

Amortization of patent ($88,000 ÷ 10 years) ................... 8,800

*The research and development expenses could be listed by the

components rather than in one total. The details of the research and
development expenses are as follows:

Depreciation—building
($320,000 ÷ 20 years)..................................................... $ 16,000
Salaries and employee benefits ...................................... 195,000
Other expenses ................................................................ 77,000

(b) Balance sheet items and amounts as of December 31, 2020:

Land .................................................................................. $ 60,000

Building (net of accumulated depreciation
of $16,000) ..................................................................... 304,000
Patent (net of amortization of $15,400)* ......................... 72,600
*([$88,000 ÷ 10] X 3/4) + ($88,000 ÷ 10)

All research and development costs should be charged to expense

when incurred. Therefore, all of Wright Tool Company’s costs related
to its research and development activities for 2020 would be expensed
regardless of the long-term benefits.

The patent was acquired for manufacturing rights rather than for use
in research and development activities. Consequently, the cost of the
patent can be capitalized as an intangible asset and amortized over its
useful life.
LO: 2, 4, 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

12-30 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)