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SM 12

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328 views154 pages

SM 12

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Tthirteenth Canadian Edition

CHAPTER 12

INTANGIBLE ASSETS AND GOODWILL

Learning Objectives
1. Understand the importance of goodwill and intangible assets
from a business perspective and describe their
characteristics.
2. Identify and apply the recognition and measurement
requirements for purchased intangible assets.
3. Identify and apply the recognition and measurement
requirements for internally developed intangible assets.
4. Explain how intangible assets are accounted for after initial
recognition.
5. Identify and explain the accounting for specific types of
intangible assets.
6. Explain and account for impairment and derecognition of
limited-life and indefinite-life intangible assets.
7. Explain how goodwill is measured and accounted for after
acquisition.
8. Explain and account for impairment of goodwill.
9. Identify the types of disclosure requirements for intangible
assets and goodwill and explain the issues in analyzing these
assets.
10. Identify differences in accounting between IFRS and ASPE.
11. Explain and apply basic approaches to valuing goodwill.

Solutions Manual 12.1 Chapter 12

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Tthirteenth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Ite LO BT Item LO BT Item LO BT Ite LO BT Ite LO BT
m m m
Brief Exercises
1. 1 C 6. 2,3,5 AP 11. 3 C 16. 6,10 C 21. 7 AP
2. 1,2,3 C 7. 2,3 AP 12. 3,4,10 C 17. 6,10 C 22. 8,10 AP
3. 2,3,10 AP 8. K 13. 2,4 A 18. 6,10 C 23. 8,10 AP
2,3,5,10 P
4. 2,3,4 AP 9. AP 14. 2,4 A 19. 6 C 24. 11 AP
2,3,4,10 P
5. 2 AP 10. 2,4,5 AP 15. 2,4,10 C 20. 6,7 C
Exercises
1. 2,5,10 K 7. AP 13. 2,5,9 A 19. 6,10 AP 25. 11 AP
2,3,4,5 P
2. 2,5,7,10 K 8. AP 14. 6,10 A 20. 7 AP 26. 11 AP
3,4,10 P
3. 2,3,5,7,10 AP 9. AP 15. 6,10 A 21. 7,8,10 AP 27. 11 AP
3,4,5,10 P
4. 2,3,4,10 AP 10. AP 16. 6,10 A 22. 8,10 AP
2,3,4,5,10 P
5 2,3,4,10 AP .11. AP 17. 6,10 A 23. 11 AP
3,4,6,10 P
6. 2,3,4,5 AP 12. AP 18. 6,10 A 24. 11 AP
2,4,6,10 P
Problems
1. 2,3 AP 4. 2,4,7 AP 7. 4 A 10. 5,6 C 13. 11 AP
P
2. 2,4 AP 5. 2,4 AP 8. 6,8 A 11. 7,8 AP 14. 11 AP
P
3. 2,4 AP 6. 3 AP 9. 6,8 A 12. 7,8 AP 15. 6,8 AP
P
Cases
IC1. 3 AP IC 2. 3,5,9 AN IC 8,9 A
3. N
Research and Analysis
1. 6,8,9 AP 2. 3,5 AN 3. 3,6,7 A 4. 1,7,8 AP
N

Solutions Manual 12.2 Chapter 12

Legend: The following abbreviations will appear throughout the solutions

manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
DAIS Data Analytics and Information Systems
ASSIGNMENT CLASSIFICATION TABLE

Solutions Manual 12.3 Chapter 12

Topic Brief Exercise Exercise Problem

1. Importance of and characteristics 1, 2 1, 2, 3
of intangible assets

2. Recognition, measurement of 2, 3, 4, 5, 6, 7, 8, 1, 2, 3, 4, 5, 6, 4
purchased intangibles 9, 10, 13, 14, 15 7, 10, 12, 13

3. Recognition, measurement of 2, 3, 4, 6, 7, 8, 9, 4, 5, 6, 7, 8, 9, 1, 6
internally developed intangibles 11, 12 10, 11

4. Subsequent accounting for 9, 10, 12, 13, 14, 3, 4, 5, 6, 7, 8, 2, 3, 4, 6, 7, 10

intangibles 15 9, 10, 11, 12

5. Accounting for specific types of 6, 8, 10 1, 2, 3, 6, 7, 9, 5, 8, 15

intangibles 10, 13

6. Impairment of limited-life and 16, 17, 18, 19, 11, 12, 14, 15, 8, 9, 10, 15
indefinite-life intangibles 20 16, 17, 18, 19

7. Accounting for goodwill 20, 21 2, 3, 20, 21 4, 6, 9, 11, 12,

13, 14

8. Goodwill impairment 22, 23 21, 22 8, 9, 11, 12

9. Disclosure and analysis 19 1, 2, 3, 6, 8

10. IFRS vs. ASPE 3, 8, 9, 12, 15, 1, 2, 3, 4, 5, 8, 2, 3, 5, 9, 11,

16, 17, 18, 22, 9, 10, 11, 12, 12
23 14, 15, 16, 17,
18, 19, 21, 22

11. *Basic approaches to valuing 24 23, 24, 25, 26, 13, 14

goodwill 27
*This material is covered in an Appendix to the chapter.

Solutions Manual 12.4 Chapter 12

ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Description Difficulty (minutes)

E12.1 Classification issues—intangibles Moderate 15-20

E12.2 Classification issues—intangibles Simple 15-20
E12.3 Classification issues—intangibles Moderate 10-15
E12.4 Intangible amortization Moderate 15-20
E12.5 Correction of intangible asset account Moderate 15-20
E12.6 Recognition and amortization of Simple 15-20
intangibles
E12.7 Accounting for trade name Moderate 25-30
E12.8 Internally generated intangibles Simple 10-15
E12.9 Internally generated intangibles Moderate 25-30
E12.10 Accounting for patents, franchises, Moderate 20-25
and R&D
E12.11 Internally developed intangibles Moderate 25-30
E12.12 Revaluation model Moderate 40-45
E12.13 Recognition and analysis of Moderate 15-20
Intangibles
E12.14 Impairment testing and DAIS Simple 20-25
E12.15 Impairment testing Simple 10-15
E12.16 Impairment testing Simple 20-25
E12.17 Impairment testing Simple 10-15
E12.18 Intangible impairment Moderate 15-20
E12.19 Intangible impairment Simple 15-20
E12.20 Accounting for goodwill Simple 10-15
E12.21 Accounting for goodwill Simple 25-30
E12.22 Goodwill impairment Moderate 15-20
*E12.23 Calculation of normalized earnings Simple 10-15
*E12.24 Calculation of goodwill Moderate 20-25
*E12.25 Calculation of goodwill Moderate 10-15
*E12.26 Calculation of goodwill Simple 10-15
*E12.27 Calculation of fair value of identifiable Moderate 10-15
assets

P12.1 Intangible-type expenditures Moderate 25-35

P12.2 Franchise, patents, and trademark Moderate 25-35
P12.3 Comprehensive problems on Complex 50-70
intangibles
P12.4 Correct intangible asset account Moderate 20-25

Solutions Manual 12.5 Chapter 12

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)

Level of Time
Item Description Difficulty (minutes)
P12.5 Accounting for R&D costs and patent Moderate 20-25
P12.6 Accounting for R&D costs and patent Moderate 20-25
P12.7 Revaluation model Moderate 45-50
Comprehensive intangible and
P12.8 Moderate 30-40
impairment
Comprehensive intangible and
P12.9 Moderate 15-20
impairment – IFRS
P12.10 Determine useful life of intangibles Moderate 25-30
P12.11 Calculation of goodwill and impairment Moderate 30-25
Comprehensive goodwill impairment –
P12.12 Moderate 15-20
IFRS
*P12.13 Calculate goodwill and company value Moderate 20-25
*P12.14 Valuing goodwill Moderate 25-30
P12.15 Valuing goodwill and impairment Moderate 15-20

Solutions Manual 12.6 Chapter 12

SOLUTION TO BRIEF EXERCISES

BRIEF EXERCISE 12.1

a. Intangible assets likely include:

1. Purchased trademark “Healthy Originals” and its related

internet domain name
2. Purchased patented cookie recipes
3. Expenditures related to infrastructure and graphical design
development of company website and other social media
accounts and content.

b. All the company’s most important assets are intangible assets,

including the “Healthy Originals” trademark, the patented
cookie recipes, and the company’s website. The intangible
assets help protect the revenues of the business by allowing the
company to sell a unique product (cookies produced from a
patented recipe), under a unique brand name (“Healthy
Originals”), and through a unique website.

c. The intangible assets meet the definition of an asset because they

involve present economic resources, and the company has
control over their future benefits and can restrict others’ access.
Recording of intangible assets on the company’s statement of
financial position provides users with relevant and faithfully
representative information about the company’s expected future
economic benefits, as well as financial statements that are free
from error or bias.
LO 1,2,3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.7 Chapter 12

BRIEF EXERCISE 12.2

a. This should not be an intangible asset because, while the

software lacks physical substance and is nonmonetary, it is not
identifiable as a separate component from the manufacturing
machine. Generally, if the software is needed for the physical
component to operate, it is treated as an item of property, plant,
and equipment.

b. This software fulfills the three criteria because it is identifiable

and separable from the related computer hardware, it lacks
physical substance, and is nonmonetary.

c. Expenditures on this software would be subject to the criteria

for internally developed intangible assets. All expenditures
incurred during the research phase would be expensed. Only
expenditures incurred after the six required conditions are met
in the development phase can be recognized as the intangible
asset – software product development costs. These costs would
meet the three criteria for intangible assets as opposed to
property, plant, and equipment since they lack physical
substance, are nonmonetary, and are identifiable. When the
software product enters the production process, the
development costs that met the capitalization criteria are
amortized into Inventory, most likely over the number of units
produced.

d. This item represents inventory, not an intangible asset.

Remember, as discussed in Chapter 8, items purchased for
resale to customers are inventory. Intangible assets are not held
for sale, but rather are used by the business to facilitate its
operations.
LO 1,2,3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.8 Chapter 12

BRIEF EXERCISE 12.3

a. Both ASPE and IFRS - Expense as salaries and wages expense

b. Both ASPE and IFRS - Capitalize if the development phase
criteria for capitalization are all met; otherwise expense. For
ASPE, even if criteria for capitalization is met, company has the
option to expense if that is the accounting policy choice.
c. Both ASPE and IFRS - Expense as advertising expense
d. Both ASPE and IFRS - Expense as selling expenses
e. Both ASPE and IFRS - Expense as research and development
expense
f. If reporting under ASPE, depending on the company’s
accounting policy, expense or capitalize when the six
development stage criteria for capitalization are met. If reporting
under IFRS, capitalize when the six development stage criteria
for capitalization are met.

LO 2,3,10 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.4

Copyright No. 1 for $36,000 should be capitalized. Its carrying value

on the December 31, 2023 statement of financial position would be
$30,000 [$36,000 - ($36,000 X 1/3 X 6/12)].

Copyright No. 2 for $54,000 should be capitalized. Although it seems

to have an indefinite useful life, it may still need to be amortized. For
example, if it is not updated on a regular basis, it would have a
maximum life of 50 years. However, if the text is regularly updated
(for example, if it has multiple editions, and multiple authors), it
could be argued that it has an indefinite life. In that case, it could be
reflected on the December 31, 2023 statement of financial position at
its cost of $54,000, without amortization.
LO 2,3,4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.9 Chapter 12

BRIEF EXERCISE 12.5

Intangible Assets – Trademarks......................................

158,610
Notes Payable ......................................................... 158,610
(a) Using Table A.4 ($44,000 x 3.60478) = $158,610.30

(b) Using a financial calculator

PV ? Yields $158,610.15
I 12%
N 5
PMT $(44,000)
FV -
Type 0

(c) Excel formula: =PV(rate,nper,pmt,fv,type)

Result: $158,610.15
A step-by-step solution for this section of the problem can be found
in the student resources section of the online course.

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.10 Chapter 12

BRIEF EXERCISE 12.6

Amort.
Carrying Life in Per Months
Amount Months Month Amort.
Patent (1/1/23) $365,000 961 $3,802 12
Legal cost (12/1/23) 106,000 85 $1,247 1
$471,000
1
(8 X 12)

Carrying amount $471,000

Less: Amortization Patent (12 X $3,802) (45,624)
Legal costs (1 X $1,247) (1,247)
Carrying amount 12/31/23 $424,129

The accounting for the research expense of $140,000 is very clear in

that no costs incurred on research or in the research phase of an
internal project meet the criteria for recognition as an asset.

An intangible asset can only be recognized from the development

phase of an internal project when the six criteria for capitalization
are met.

Therefore, the research costs of $140,000 must be expensed in the

period, because they were incurred before the required criteria for
capitalization were fulfilled.
LO 2,3,5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.11 Chapter 12

BRIEF EXERCISE 12.7

Intangible Assets - Software (New)1................................ 8,980

Accumulated Amortization – Software........................... 8,000
Loss on Disposal of Intangible Assets........................... 2,000
Cash.......................................................................... 8,980
Intangible Assets - Software (Old)......................... 10,000
1
$7,500 + $1,480 = $8,980

Specifically excluded as capitalized costs are selling, administrative,

and other general overhead costs that cannot be directly linked to
preparing the asset for use, and costs incurred to train employees.
These would be expensed as period costs.
LO 2,3 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.12 Chapter 12

BRIEF EXERCISE 12.8

a. and c.
Capitalized Expensed
1. Capitalized. $3,000
2. Expensed. $5,500
3. Expensed. 1,000
4. Expensed. 1,500
5. Capitalized 6,000
6. Capitalized. 10,000
7. Expensed. 7,000
8. Expensed. 15,250
9. Expensed. 2,500
10. Capitalized. 17,500 ______
Total $36,500 $32,750

ASPE allows costs associated with the development of

internally generated intangible assets that meet the six
conditions in the development stage to either be capitalized or
expensed depending on the entity’s policy choice. Therefore,
items 5 and 10 would be expensed if the policy choice is to
expense all development costs.

A step-by-step solution for this section of the problem can be found

in the student resources section of the online course.

LO 2,3,5,10 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.13 Chapter 12

BRIEF EXERCISE 12.9

As a private company applying ASPE, Sweet Tooth has the option to

either recognize all costs of internally generated intangible assets as
an expense or to recognize the costs as an internally generated
intangible asset when the six development phase criteria for
capitalization are met.

If Sweet Tooth chooses to expense, all costs incurred will be

expensed as research and development activities.

Research and Development Expense............................. 161,000

Cash.......................................................................... 161,000
($45,000 + $15,000 + $2,0001 + $72,000 + $15,000 + $12,000)

If Sweet Tooth chooses to capitalize, all costs incurred would be

capitalized once the six criteria were met in May 2023. The costs
incurred prior to the date the required criteria were met must be
expensed as research and development expense.

Intangible Assets - Development Costs......................... 134,000

Research and Development Expense
($15,000 + $12,000).......................................................
27,000
Cash.......................................................................... 161,000
($45,000 + $15,000 + $2,0001+ $72,000) = $134,000
1
Under ASPE, interest costs directly attributable to the acquisition,
construction, or development of an intangible asset, once it meets
the criteria to be capitalized, may be capitalized or expensed
depending on the company’s accounting policy for borrowing costs.

If Sweet Tooth were a public company following IFRS, all costs

associated with the development of internally generated intangible
assets would be capitalized when the six development phase criteria
for capitalization were met. The costs incurred prior to the date the
required criteria were met would be expensed as research and
development expense.

LO 2,3,4,10 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.14 Chapter 12

BRIEF EXERCISE 12.10

The asset purchase would be capitalized using the relative fair value
method. The assets should be separated so that the amortization
expense can be determined based on each asset’s useful life.

Fair % of Recorded
Value Total X Cost = Amount
(rounded)
Trade Name $280,000 28/89 $800,000 $251,685
Customer List 290,000 29/89 800,000 260,674
Manuf. Equip. 320,000 32/89 800,000 287,641
$890,000 $800,000

Intangible Assets - Trade Names.................................... 251,685

Intangible Assets - Customer List................................... 260,674
Equipment.........................................................................
287,641
Cash.......................................................................... 800,000

Specifically excluded are initial operating losses after the assets

have been put into use.

A step-by-step solution for this section of the problem can be found

in the student resources section of the online course.

LO 2,4,5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.11

Specifically excluded as capitalized costs are selling, administrative,

and other general overhead costs that cannot be directly linked to
preparing the asset for use, and costs incurred to train employees.
Costs incurred to promote or launch products must also be
expensed as period costs.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.15 Chapter 12

BRIEF EXERCISE 12.12

Effective January 1, 2016, IAS 38.92 clarified that amortization

methods based on revenue generated by an activity that includes
the use of an intangible asset are not appropriate. Green Earth Corp.
will need to use a systematic and rational approach at allocating the
software cost of $450,000 over its benefiting periods.

If ASPE is used to prepare financial statements, then the company

has the option to capitalize the costs associated with the software
development or expense all costs as incurred. If the company’s
policy is to expense, then no amortization is recorded as all costs
would be written off in the year incurred. Also, because ASPE has
not introduced the same clarification as IFRS (as discussed above),
the company could consider amortization based on revenue
generated. However, another systematic and rational approach such
as straight-line amortization would be preferable.
LO 2,3,10 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.13

Intangible Assets - Patents..............................................87,000

Cash.......................................................................... 87,000
To record purchase of patent

Amortization Expense1.....................................................
5,438
Accumulated Amortization - Patents..................... 5,438
1
($87,000 X 1/16)
To record amortization expense

LO 2,4 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.16 Chapter 12

BRIEF EXERCISE 12.14

Intangible Assets - Patents.............................................. 26,000

Cash.......................................................................... 26,000
To record disbursement related to patent

Amortization Expense1.....................................................
14,589
Accumulated Amortization - Patents..................... 14,589
1
[($87,000 – $5,438 – $5,438 + $26,000) X 1/7]
To record amortization expense
LO 2,4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.17 Chapter 12

BRIEF EXERCISE 12.15

(a) It is probable that the entity will receive the expected future
economic benefits, and the cost of the licences can be
measured reliably, therefore the recognition criteria for
intangible assets are met and the licences are capitalized:

December 31, 2023

Intangible Assets – Licences1..........................................
10,000
Cash.......................................................................... 10,000
1
10 X $1,000

(b) If Convenient Cabs follows ASPE, the licences are accounted

for under the Cost Model, which measures the licences after
acquisition at their cost less accumulated amortization and any
accumulated impairment losses.

(c) Under IFRS, intangible assets are accounted for under the Cost
Model or the Revaluation Model; however, the Revaluation
Model can only be applied to intangible assets that have a fair
value determined in an active market. There is an active market
for taxi licences in Somerdale, therefore Convenient Cabs may
account for the licences either under the Cost Model or the
Revaluation Model. The Cost Model would measure the
licences after acquisition at their cost less accumulated
amortization and any accumulated impairment losses. The
Revaluation Model would measure the licences after
acquisition at their fair value at the date of revaluation less any
subsequent accumulated amortization and any subsequent
losses on impairment.

LO 2,4,10 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.18 Chapter 12

BRIEF EXERCISE 12.16

Under ASPE, the cost recovery impairment model for limited-life

intangible assets would apply in this case. The undiscounted future
cash flows are first compared to the carrying amount. If
undiscounted future cash flows < carrying amount, the asset is
impaired, and the loss on impairment is calculated as the difference
between the asset’s carrying amount and fair value.

Undiscounted future cash flows ($125,000) > Carrying amount

($83,750), therefore the asset is not considered to be impaired.
LO 6,10 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.17

Under IFRS, the rational entity impairment model would apply. If

carrying amount > recoverable amount (where recoverable amount
is the higher of value in use and fair value less costs to sell), the
loss on impairment is calculated as the difference between carrying
amount and recoverable amount.

In this case, the recoverable amount is $95,200 (because value in

use is higher than the fair value less costs to sell), and there is no
loss on impairment as the carrying amount of $83,750 does not
exceed the recoverable amount of $95,200.
LO 6,10 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.19 Chapter 12

BRIEF EXERCISE 12.18

(a) Under ASPE, for indefinite-life intangible assets, the impairment

test is a comparison of carrying amount with the asset’s fair
value, where impairment loss is equal to the difference when fair
value is lower. Carrying amount ($83,750) > fair value ($45,000),
therefore the trademark is impaired and impairment loss is
calculated as $38,750 ($83,750 - $45,000).

(b) Under IFRS, the rational entity impairment model applies. There
is no loss on impairment as the carrying amount of $83,750 does
not exceed the recoverable amount of $95,200 (where
recoverable amount is the higher of value in use and fair value
less costs to sell).
LO 6,10 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.19

Types of Big Data that would be useful to gather to support a test of

impairment of the company’s trade name include:

 Trends of market share of department stores in the retail

industry
 Trends of consumer spending by industry
 Future spending projections for the retail industry
 Market interest rates
 Economic information such as discretionary income and
spending by household
 Economic outlook by province, depending on penetration of
sales for McKlean’s in each specific province

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.20 Chapter 12

BRIEF EXERCISE 12.20

Sustainability of earnings may be connected to the environmental

sustainability of a company’s products or services. It is possible that
the consumer report may impact demand for CleanCar and that
intangible assets such as Goodwill, Patents and/or Trade Name are
impaired. Even though only a specific model is related to the
increase in carbon emissions, there may be an impact on all of
CleanCar’s intangible assets. This may reduce the discounted future
net cash flows, the fair value or the undiscounted future net cash
flows expected from the use of related intangible assets and indicate
impairment.

LO 6,7 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 12.21

Fair value of consideration

transferred $954,000
Fair value of assets $1,140,000
Less fair value of liabilities (420,000)
Fair value of net assets 720,000
Value assigned to goodwill $234,000

LO 7 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.21 Chapter 12

BRIEF EXERCISE 12.22

Under IFRS, the recoverable amount of the CGU is compared with its
carrying amount to determine if there is any impairment.

Based on the information provided, the recoverable amount of the

CGU is the greater of:
- Fair value less costs to sell = $3,575,000
- Value in use = $3,680,000

Recoverable amount of CGU $3,680,000

Carrying amount of CGU 3,740,000

Loss on impairment $60,000

The goodwill is impaired because carrying amount of the CGU >

recoverable amount of the CGU. The goodwill loss on impairment is
$60,000 ($3,740,000 - $3,680,000).

LO 8,10 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.22 Chapter 12

BRIEF EXERCISE 12.23

Under ASPE, goodwill is assigned to a reporting unit at the

acquisition date. Goodwill is tested for impairment when events or
changes in circumstances indicate impairment may exist.

There is a loss on impairment if the carrying amount of the reporting

unit (including goodwill) exceeds the fair value of the reporting unit.

Carrying amount of unit $3,581,000

Fair value of unit 3,474,000
Loss on impairment $107,000

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*BRIEF EXERCISE 12.24

Average earnings [($750,000 – $94,000) X 1/5] $131,200

Normal earnings ($690,000 X 15%) (103,500)
Excess earnings 27,700
Capitalization rate  20%
Estimated goodwill $138,500
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Solutions Manual 12.23 Chapter 12

SOLUTIONS TO EXERCISES

EXERCISE 12.1

a. 3, 10, 15, 16, 17, 19, 201, 23, 252, 263

b. 1. Long-term investments on the statement of financial

position.
2. Biological asset on the statement of financial position.
4. Current asset (prepaid rent) on the statement of financial
position.
5. Property, plant, and equipment on the statement of
financial position.
6. Research and development expense on the income
statement.
7. Expense on the income statement.
8. Operating losses on the income statement.
9. Expense on the income statement
11. Not recorded; any costs incurred related to creating
goodwill internally must be expensed.
1
12. Research and development expense on the income
statement.
13.Goodwill should be shown as a separate line item on the
statement of financial position.
14. Research and development expense on the income
statement.
18. Research and development expense on the income
statement.
21. Long-term investments, or other assets, on the statement
of financial position.
22. Expense on the income statement.
24. Expense on the income statement.

Solutions Manual 12.24 Chapter 12

EXERCISE 12.1 (CONTINUED)

b. (continued)
1
Capitalized as development costs only if they meet all six
development phase criteria for capitalization. See further
discussion under part c.
2
Intangible asset to the extent a lump sum was paid in advance to
secure the contract since it is identifiable, separable (as based on
a contractual period), lacks physical substance, and is
nonmonetary. The intangible asset is then amortized as the
services are provided. Note that if monies were paid under the
contract over the contract period, they would be recognized as
normal advertising and promotion costs, which are expensed as
period costs.
3
Treatment of borrowing costs differs between IFRS and ASPE. See
further discussion under part c.

c. There are differences with respect to capitalization of borrowing

costs and capitalization of research and development costs:

 Under IFRS, borrowing costs that are directly attributable to

the acquisition, construction, or development of qualifying
intangible assets are capitalized, once the six development
phase criteria are met. Under ASPE, interest costs directly
attributable to the acquisition, construction, or development of
an intangible asset may be capitalized or expensed depending
on the entity’s accounting policy, once the six development
phase capitalization criteria are met.
 Under ASPE, costs associated with development of internally
generated intangible assets that meet the six criteria in the
development stage, may be capitalized or expensed,
depending on the entity’s accounting policy. There is no
accounting policy choice under IFRS (under IFRS, costs
associated with the development of internally generated
intangible assets are capitalized when the six criteria in the
development stage are met).

Solutions Manual 12.25 Chapter 12

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Solutions Manual 12.26 Chapter 12

EXERCISE 12.2

a.
The following items would be classified as intangible assets:
Cable Television Franchises
Film Contract Rights
Music Copyrights
Customer Lists Acquired in a Business Combination
Covenants Not to Compete
Brand Names
In-Process R&D Acquired in a Business Combination1

An intangible for customer lists usually results from a company

purchasing a list from another party.

A covenant not to compete may arise when a company pays another

company a fee to ensure that the company does not compete in a
given area.

Other items:

Cash, accounts receivable, notes receivable due within one year

from statement of financial position date, and prepaid expenses
would be classified as current assets.

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

current assets in the tangible property, plant, and equipment
section.

Leasehold improvements are generally shown in the tangible

property, plant, and equipment section, although some accountants
classify them as intangible assets. The rationale for intangible asset
treatment is that the improvements revert to the lessor at the end of
the lease and therefore are more of a right than a tangible asset.

Investments in affiliated companies would be classified as part of

the investments section on the statement of financial position.

Solutions Manual 12.27 Chapter 12

EXERCISE 12.2 (CONTINUED)

a. (continued)

Research costs, organization cost, and the annual franchise fee

would be classified as operating expenses.

Goodwill2 should be shown as a separate line item on the statement

of financial position.
1
In-process R&D is recognized as an intangible asset when it is
acquired as part of a business combination.
2
The excess of purchase price over fair value of identifiable net
assets of X Corp. is the amount assigned to goodwill in a business
combination.

b. If the company follows ASPE instead of IFRS, the internally

generated intangible assets that meet the six criteria for
capitalization can be expensed instead of capitalized. The
company can make an accounting policy choice between
capitalizing and expensing these costs.
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Solutions Manual 12.28 Chapter 12

EXERCISE 12.3

a. Development phase activities 29,000

Trademarks 17,500
Favourable lease 15,000
Total intangible assets $61,500

b. Excess of cost over fair value of net assets of acquired

subsidiary – Goodwill, $81,000, should be shown as a separate
line item on the statement of financial position.

Deposits with advertising agency for ads to promote goodwill of

company, $8,000, should be reported either as an expense or as
prepaid advertising in the current assets section. Advertising
costs in general are expensed when incurred or when first used.

Cost of equipment acquired for research and development

projects, $125,000, should be reported with property, plant, and
equipment. Even if it was to be used only with a specific project,
because it would be used over a number of periods, it would be
capitalized and depreciated as a research and development
expense over the period of use.

Costs of researching a secret formula for a product that is

expected to be marketed for at least 20 years ($75,000) should
be expensed as part of Research and Development Expense.
Development expenses are expensed unless all six criteria for
capitalization are met.

Organization costs of $34,000 are a period cost and expensed in

the income statement.

Solutions Manual 12.29 Chapter 12

EXERCISE 12.3 (CONTINUED)

c. If ASPE is followed, then the development phase activities of

$29,000 can be expensed if the company’s policy choice is to
expense all costs directly attributable to the development of an
intangible asset even when the six criteria are met.
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Solutions Manual 12.30 Chapter 12

EXERCISE 12.4

a. At December 31, 2023, Mount Olympus should report the

patent at $1,080,000 ($1,800,000 net of $720,000 accumulated
amortization) on the statement of financial position. The
calculation of accumulated amortization is as follows.

Amortization for 2021 and 2022:

($1,800,000/10) X 2 $360,000
2023 amortization:
($1,800,000 – $360,000)  (6–2) 360,000
Accumulated amortization, 12/31/23 $720,000

b. Mount Olympus should amortize the franchise over 25 years,

the period of identifiable cash flows. Even though the franchise
is perpetual, the company believes it will generate future
economic benefits for only 25 years. The amount of
amortization of the franchise for the year ended December 31,
2023, is $26,000: ($650,000/25).

c. Unamortized development costs would be reported as $150,000

($375,000 net of $225,000 accumulated amortization) at
December 31, 2023.

Amortization for 2021, 2022, and 2023:

($375,000/5) X 3 $225,000

If Mount Olympus followed ASPE, they might have chosen to

expense the $375,000 in 2021 and therefore would report no
amortization expense for 2021 – 2025.
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Solutions Manual 12.31 Chapter 12

EXERCISE 12.5

Research and Development Expense.............................

1,050,000
Intangible Assets - Development Costs.........................
215,000
Intangible Assets - Patents..............................................
45,000
Rent Expense [(5  7) X $49,000].....................................
35,000
Prepaid Rent [(2  7) X $49,000].......................................
14,000
Advertising Expense........................................................
157,000
Operating Expenses.........................................................
316,000
Common Shares...................................................... 296,000
Intangible Assets..................................................... 1,536,000
To correct intangible asset account

Amortization Expense1.....................................................2,250
Accumulated Amortization - Patents..................... 2,250
1
[($45,000  10) X 6/12]
To record amortization expense.

Amortization Expense2.....................................................1,792
Accumulated Amortization – Development
Costs...................................................................... 1,792
2
($215,000 ÷ 120)
To record amortization expense.

Note:
If ASPE was followed, the company may choose to expense the
Intangible Assets – Development costs of $215,000. This would
increase total expenses and decrease the Intangible Asset –
Development Costs by the same amount ($215,000).

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Solutions Manual 12.32 Chapter 12

EXERCISE 12.6

a. Journal entry to classify into proper accounts

Intangible Assets - Patents..........................................320,000
Goodwill.........................................................................
310,000
Intangible Assets - Franchises.................................... 250,000
1
Research and Development Expense ........................ 260,000
Intangible Assets – Copyrights.................................... 140,000
Advertising Expense.....................................................
33,000
Intangible Assets - Trademarks................................... 15,000
Intangible Assets - Customer List............................... 10,000
Intangible Assets..................................................... 1,338,000
1
$239,000 + $21,000 = $260,000

b. Year-end amortization
Amortization Expense..................................................
68,333
Accumulated Amortization –
Intangible Assets - Patents................................ 40,000
Accumulated Amortization –
Intangible Assets - Franchises......................... 12,500
Accumulated Amortization –
Intangible Assets - Copyrights......................... 11,667
Accumulated Amortization –
Intangible Assets - Trademarks........................ 2,083
Accumulated Amortization –
Intangible Assets - Customer List.................... 2,083

Amortization Expense:
Patents: $320,000/8 = $40,000
Franchise: $250,000/10 X 6/12 = 12,500
Copyright: $140,000/5 X 5/12 = 11,667
Trademarks: $15,000/3 X 5/12 = 2,083
Customer lists: $10,000/2 X 5/12 = 2,083
$68,333

Solutions Manual 12.33 Chapter 12

EXERCISE 12.6 (CONTINUED)

c. Carrying amounts of intangible assets as at December 31, 2023:

Patents = $320,000 – $40,000 = $280,000
Franchises = $250,000 – $12,500 = $237,500
Copyrights = $140,000 – $11,667 = $128,333
Trademarks = $15,000 – $2,083 = $12,917
Customer List = $10,000 – $2,083 = $7,917

Goodwill of $310,000 would be shown as a separate line item on

the statement of financial position.

Note – in this exercise, IFRS and ASPE treatments would be the

same.
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Solutions Manual 12.34 Chapter 12

EXERCISE 12.7

a. Variables to consider in determining the appropriate

amortization period for a limited-life intangible include:
 The legal life of the trade name (15 years in Canada) - the
registration is renewable, which could extend the legal life
indefinitely;
 The expected use of the trade name by the company;
 The effects of demand, competition, and other economic
factors;
 The period over which its benefits are expected to be
provided.

b. 2023 amortization: $52,500  15 = $3,500

12/31/23 carrying amount: $52,500 – $3,500 = $49,000

2024 amortization: ($49,000 + $28,200)  14 = $5,514

12/31/24 carrying amount: $49,000 + $28,200 – $5,514 = $71,686

c. 2023 amortization: $52,500  6 = $8,750

12/31/23 carrying amount: $52,500 – $8,750 = $43,750

2024 amortization: ($43,750 + $28,200)  5 = $14,390

12/31/24 carrying amount: $43,750 + $28,200 – $14,390 = $57,560

d. If indefinite life:

 Do not amortize if determined to have an indefinite life.

 Indefinite does not mean infinite life. If classified as indefinite
life, management should annually review this classification to
ensure that conditions and circumstances continue to support
the indefinite life assessment. If there is a change in the useful
life assessed, it will be accounted for prospectively as a
change in estimate.

Solutions Manual 12.35 Chapter 12

EXERCISE 12.7 (CONTINUED)

e. A longer estimate of useful life (as was assumed in part b.)

results in lower amortization expense on the income statement
and higher carrying amount on the statement of financial
position each period, compared to a shorter estimate of useful
life (as was assumed in part c.). If the trade name is estimated
to have an indefinite life, no expense is recorded each period
and the carrying amount of the trade name will be equal to
original cost, unless the trade name is determined to be
impaired.

The estimated useful life of the trade name should be based on

neutral and unbiased consideration of the factors discussed in
part a. A potential investor in FJS should be aware that the
estimate of useful life requires a degree of professional
judgement, and that the determination of useful life can have a
material effect on the statement of financial position as well as
the income statement.

Note – in this exercise IFRS and ASPE treatments would be the

same.
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Solutions Manual 12.36 Chapter 12

EXERCISE 12.8

a.
Depreciation of equipment acquired
for use in research and development
projects over the next 5 years ($240,000  5) $ 48,000
Materials consumed in research projects 61,000
Consulting fees paid to outsiders for research and
development projects ($95,000 - $4,500) 90,500
Personnel costs of persons involved in research and
development projects 108,000
Indirect costs reasonably allocable to research and
development projects 25,000
Total to be expensed in 2023 for Research and
Development $332,500

Note that the cost of the materials consumed in the

development of a product committed for manufacturing in the
first quarter of 2024 and the consulting fees related to the
materials are likely costs incurred after the six development
phase criteria have been met. As such, they would be charged
to an intangible asset account such as Product Development
Costs that would be amortized over the benefiting periods.

b. Treatment of training costs and borrowing costs incurred after

the six development phase criteria are met:

 Training costs relate to selling activities and should not be

categorized as research and development activities. If these
costs were incurred after the six development phase criteria for
capitalization were met, they would not be capitalized because
they are not direct costs of creating, producing, and preparing
the asset to operate in the way intended by management.

 Under IFRS, borrowing costs that are directly attributable to the

acquisition, construction, or development of a qualifying
intangible asset are capitalized once the required capitalization
criteria are fulfilled.

Solutions Manual 12.37 Chapter 12

EXERCISE 12.8 (CONTINUED)

c. Under ASPE, the cost of the materials consumed in the

development of a product committed for manufacturing in the
first quarter of 2024 and the consulting fees related to the
materials might be expensed if the company’s policy is to
expense amounts that meet the six criteria for capitalization
(under the same assumption that these are costs incurred after
the six criteria have been met).

Under ASPE, interest costs directly attributable to the

acquisition, construction, or development of an intangible asset
may be capitalized or expensed depending on the entity’s
accounting policy for internally generated assets and the
entity`s policy on capitalization of interest costs.
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Solutions Manual 12.38 Chapter 12

EXERCISE 12.9

a. Fiscal 2023: The $392,000 is a research and development cost

that should be charged to Research and Development (R & D)
Expense and, if not separately disclosed on the income
statement, total R & D Expense should be separately disclosed
in the notes to the financial statements. These costs are not
eligible for capitalization since the six development phase
criteria for capitalization are not met.

b. Fiscal 2024:
Research and Development Expense............................. 71,000
Cash............................................................................71,000
To record research phase costs
assuming the criteria are not
fulfilled for the development phase

Intangible Assets - Patents..............................................

10,000
Cash............................................................................10,000
To record legal and administrative
costs incurred to obtain patent

Amortization Expense1.....................................................
2,000
Accumulated Amortization – Patents...................... 2,000
To record one year’s amortization expense
1
($10,000  5 = $2,000)

Solutions Manual 12.39 Chapter 12

EXERCISE 12.9 (CONTINUED)

c. Fiscal 2025:
Intangible Assets - Patents..............................................
12,400
Cash.......................................................................... 12,400
To record legal cost of successfully defending
patent

Amortization Expense2.....................................................
2,267
Accumulated Amortization –Patents..................... 2,267
To record one year’s amortization expense
2
$10,000 – $2,000 + $12,400 = $20,400;
$20,400  9 = $2,267

The cost of defending the patent is capitalized because the

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

d. Pre-Sept 2025:

Under IFRS, costs associated with the development of

internally generated intangible assets are capitalized when the
six specific criteria for capitalization are met in the
development stage. As such, costs incurred before the future
benefits are reasonably certain (i.e., before the six specific
criteria for capitalization are met) must be expensed. The
$101,000 must be expensed since it was incurred before the
future benefits were reasonably certain (that is, these
expenditures helped to establish the existence of future
benefits).

Research and Development Expense ............................ 101,000

Cash.......................................................................... 101,000
To record research and development phase costs

Solutions Manual 12.40 Chapter 12

EXERCISE 12.9 (CONTINUED)

d. (continued)

Post-Sept 2025:
Costs incurred after the six specific criteria for capitalization
are met, are capitalized. Therefore, assuming after incurring
the $101,000 costs by early September that the company’s
intention and ability to generate future economic benefits
could also be demonstrated, the $66,000 would be capitalized
as development costs.

Intangible Assets - Development Costs ........................ 66,000

Cash.......................................................................... 66,000
To record costs meeting the capitalization
criteria – to be amortized over the benefiting
periods after manufacturing begins
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Solutions Manual 12.41 Chapter 12

EXERCISE 12.10

a. Tennessee Corp.
INTANGIBLES SECTION OF
STATEMENT OF FINANCIAL POSITION
December 31, 2023
Patent, net of accumulated amortization
(Schedule 1) $864,000
Franchise, net of accumulated amortization
(Schedule 2) 261,000
Total intangibles $1,125,000

Schedule 1: Calculation of Patent from Marvin Inc.

Cost of patent at date of purchase $1,200,000
Amortization of patent for 2022 ($1,200,000/10) (120,000)
1,080,000
Amortization of patent for 2023 ($1,080,000/5) (216,000)
Patent balance $864,000

Schedule 2: Calculation of Franchise from Burr Ltd.

Cost of franchise at date of purchase $ 290,000
Amortization of franchise for 2023 ($290,000  10) (29,000)
Franchise balance $ 261,000

Solutions Manual 12.42 Chapter 12

EXERCISE 12.10 (CONTINUED)

b. Tennessee Corp.
Income Statement Effect
For the Year Ended December 31, 2023
Revenue from franchise $1,400,000
Expenses:
Patent from Marvin Inc.:
Amortization of patent for 2023
(Schedule 1) 216,000
Franchise from Burr Ltd.:
Amortization of franchise for 2023
(Schedule 2) $ 29,000
Payment to Burr Ltd.
($1,400,000 X 5%) 70,000 99,000
Research and development expense 247,000
Net increase in income $838,000

c. If Tennessee is a public company, the accounting would remain

consistent with that provided above. Tennessee would have
additional options under IFRS to use the revaluation model to
measure intangible asset(s) after acquisition. However, this
would only be possible if there is an active market for the
intangible asset(s). In addition, under IFRS, an assessment of
estimated useful life is required at each reporting date.

Under IFRS, costs associated with the development of internally

generated intangible assets that meet the six development phase
criteria for capitalization are capitalized (no policy choice). Under
ASPE, costs associated with the development of internally
generated intangible assets that meet the six development phase
criteria for capitalization may be capitalized or expensed,
depending on the entity’s accounting policy.

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Solutions Manual 12.43 Chapter 12

EXERCISE 12.11

a. Research and Development Expense............................. 1,800,000

Cash.......................................................................... 1,800,000
Costs incurred before the development phase
criteria for capitalization are fulfilled are not
capitalized

Intangible Assets – Software1..........................................

2,900,000
Cash.......................................................................... 2,900,000
1
($4,700,000 – $1,800,000)

1
Under ASPE, costs associated with development of internally
generated intangible assets that meet the six development phase
criteria for capitalization may be capitalized or expensed,
depending on the entity’s accounting policy.

The journal entry if the accounting policy was to expense all

research and development costs would be as follows:

Research and Development Expense...... 4,700,000

Cash................................................. 4,700,000

b. Amortization Expense1.....................................................
362,500
Accumulated Amortization –
Software.............................................................. 362,500
1
(1/8 X $2,900,000 = $362,500)

c. The software costs should be reported on the 12/31/24

statement of financial position at a carrying amount of
$2,900,000 – $362,500 = $2,537,500.

Solutions Manual 12.44 Chapter 12

EXERCISE 12.11 (CONTINUED)

d. Impairment testing for limited-life assets under ASPE

 Under ASPE, the cost recovery impairment model is

applied
 Software is a limited-life intangible asset and would be tested
for potential impairment whenever events and circumstances
indicate the carrying amount may not be recoverable. If there
are any indicators of impairment, the carrying amount of the
asset is compared to the undiscounted future net cash flows of
the asset to determine if the asset is impaired. If the asset is
impaired, a loss on impairment is calculated and recorded as
the difference between the asset’s carrying amount and its fair
value.
 Under ASPE, a loss on impairment may not be reversed.

Therefore, if the asset was considered impaired (carrying

amount not recoverable), the net realizable value (as an
indicator of what its fair value might be) would be valuable
information in measuring the amount of the loss on
impairment.

Solutions Manual 12.45 Chapter 12

EXERCISE 12.11 (CONTINUED)

e. If the company prepares financial statements under IFRS:

 The rational entity impairment model is applied

 At the end of each reporting period, the asset is assessed for
indicators of possible impairment. If there are any indicators of
possible impairment, the asset is tested for impairment.
 If the carrying amount is higher than the recoverable amount
(which is the higher of the value in use and the fair value less
costs to sell), the asset is impaired and a loss on impairment is
calculated and recorded as the difference between the asset’s
carrying amount and its recoverable amount.
 Costs associated with the development of internally generated
intangible assets that meet the six development phase criteria
for capitalization are capitalized (no policy choice).
 Under IFRS, a loss on impairment may be reversed in the future,
although the reversal is limited by what the carrying amount of
the asset would have been if no impairment had been
recognized initially.

Because the net realizable value (NRV) is, in effect, the asset’s
fair value less costs to sell, knowing the NRV is one of the
variables in determining whether the asset is impaired as well
as the amount of the loss on impairment.
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Solutions Manual 12.46 Chapter 12

EXERCISE 12.12

a. August 31, 2023

Administrative Expenses.................................................
12,500
Cash.......................................................................... 12,500

Application costs are expensed because the related future

economic benefits are uncertain.

b. June 30, 2024

Intangible Assets – Licences1..........................................
112,500
Cash.......................................................................... 112,500
1
(30 X $3,750)

c. Cost model

December 31, 2025, 2026, 2027

Amortization Expense2.....................................................
22,500
Accumulated Amortization -
Licences.............................................................. 22,500
2
($112,500 / 5 yrs.)
To record amortization expense

No loss on impairment is recorded at Dec. 31, 2025 as the fair

value of $4,200 exceeds the cost of $3,750 and carrying
amount.

Cost of licences at date of purchase $112,500

Amortization of licences for 2024
($112,500 / 5 yrs. X 6/12) (11,250)
Amortization of licences for 2025-27
($112,500 / 5 yrs. X 3) (67,500)
Carrying amount of licences,
as at December 31, 2027 $33,750

Solutions Manual 12.47 Chapter 12

EXERCISE 12.12 (CONTINUED)

c. (continued)

Under IFRS, the licences would be tested for impairment using

the rational entity impairment model:

As at December 31, 2027:

Carrying amount of the licences

($112,500 - $11,250 – $22,500 X 3 yrs.) $33,750

Recoverable amount of the licences

(higher of value in use $5,400 X 30 and
fair value less costs to sell (($3,800 - $200) X 30)) $162,000

Recoverable amount exceeds carrying amount, therefore no

loss on impairment in 2027.

d. Revaluation model
(Asset adjustment method)

December 31, 2025

Amortization Expense......................................................
22,500
Accumulated Amortization -
Licences.............................................................. 22,500
$112,500 / 5 yrs. = $22,500
To record amortization expense

Accumulated Amortization - Licences 33,750

Intangible Assets - Licences......................... 33,750
To eliminate accumulated amortization-licences balance

Solutions Manual 12.48 Chapter 12

EXERCISE 12.12 (CONTINUED)

d. (continued)

Intangible Assets - Licences..................................

47,250
Revaluation Surplus (OCI)............................. 47,250
($4,200 X 30) - $78,750 = $47,250
To adjust Intangible Assets – Licences account to fair value

Carrying amount of Intangible Assets - Licences as at

December 31, 2025 = $126,000 ($4,200 X 30 or $78,750 +
$47,250).

December 31, 2026

Amortization Expense3............................................
36,000
Accumulated Amortization -
Licences.......................................................... 36,000
3
$126,000/ 3.5 yrs. = $36,000
To record amortization expense

December 31, 2027

Amortization Expense......................................................
36,000
Accumulated Amortization -
Licences.............................................................. 36,000
To record amortization expense

Accumulated Amortization –Licences4..................72,000

Intangible Assets - Licences......................... 72,000
4
$36,000+ $36,000 = $72,000
To eliminate accumulated amortization-licences balance

The Intangible Assets – Licences account is now ($126,000-

$72,000) = $54,000, and the related Accumulated Amortization
account is zero.

Solutions Manual 12.49 Chapter 12

EXERCISE 12.12 (CONTINUED)

d. (continued)

Intangible Assets – Licences5...............................

60,000
Revaluation Surplus (OCI)............................. 60,000
5
($3,800 X 30) - $54,000 = $60,000
To adjust Intangible Assets – Licences account to fair value

Under IFRS, the licences would be tested for impairment using

the rational entity impairment model:

As at December 31, 2027:

Carrying amount of the licences

($54,000 + $60,000) OR ($3,800 X 30) $114,000

Recoverable amount of the licences

(higher of value in use $5,400 X 30 and
fair value less costs to sell (($3,800 - $200) X 30) $162,000

Recoverable amount exceeds carrying amount, therefore no

loss on impairment in 2027.

e. The revaluation model can only be applied to intangible assets

that have a fair value determined in an active market. To verify
that there is an active market for an intangible asset, an auditor
would verify that the items are homogenous (interchangeable),
that there is a good supply of willing buyers and sellers, and
that the prices are available to the public. In this case, the taxi
licences are interchangeable (e.g., they do not expire), and
there appears to be a good supply of willing buyers and
sellers. Assuming the prices of the taxi licences are freely
available to the public (e.g., through a central posting system),
there would be an active market for the taxi licences and they
could be measured using the revaluation model. Also, the
revaluation method is only allowed under IFRS. ASPE only
allows the use of the cost model.
LO 2,4,6,10 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.50 Chapter 12

EXERCISE 12.13

a. The asset purchase would be capitalized using the relative fair

value method. The assets should be separated so that the
amortization expense can be determined based on each asset’s
useful life.
Recorded
Fair Value % of Total X Cost = Amount
(rounded)
Domain Name $100,000 10/45 $400,000 $88,889
Customer List 250,000 25/45 400,000 222,222
Trade name 100,000 10/45 400,000 88,889
$450,000 $400,000

Step 1: Create a Pivot Table with all of the costs listed out.

Row Labels Sum of Cost

Customer List $ 222,222
Domain Name 88,889
Trade Name 88,889
Grand Total $450,000

Step 2: Right-click on pivot table - show values as % of Grand Total

Row Labels Sum of Cost

Customer List 55.56%
Domain Name 22.22%
Trade Name 22.22%
Grand Total 100.00%

Solutions Manual 12.51 Chapter 12

EXERCISE 12.13 (CONTINUED)

Step 3: From the insert ribbon, select 2-D pie chart. Right click pie
chart to add data labels

A step-by-step solution for this section of the problem can be found

in the student resources section of the online course.

LO 2,5,9 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001, cpa-t007 CM: Reporting and DAIS

Solutions Manual 12.52 Chapter 12

EXERCISE 12.14

a. Under IFRS, the recoverable amount is the higher of value in use

and fair value less costs to sell (both of which are discounted
amounts). In this case, the licence is impaired at the end of 2023
since:
Recoverable amount of $475,000 < Carrying amount of $530,000.
The loss on impairment of $55,000 would be recorded.
The journal entry under IFRS would be:
Loss on Impairment................................... 55,000
Accumulated Impairment
Losses—Licences ................ 55,000

b. If the estimates used to determine the asset’s value in use and

fair value less costs to sell have changed, then a reversal of the
impairment is recognized. The reversal amount, however, is
limited. The specific asset cannot be increased in value to more
than what its carrying amount would have been, net of
amortization, if the original loss on impairment had never been
recognized. The carrying amount would have been $530,000 -
$53,000 = $477,000.

In this case, there would be a reversal since the

Recoverable amount of $450,000 > Carrying amount of $427,5001
1
Carrying amount at end of 2024 = $475,000 – $47,500
[amortization $475,000/10] = $427,500

Therefore, carrying amount can be increased to $450,000.

Reversal = $450,000 – $427,500 = $22,500.

Accumulated Impairment Losses–Licences 22,500

Recovery of Loss from Impairment.... 22,500

Solutions Manual 12.53 Chapter 12

EXERCISE 12.14 (CONTINUED)

c. If the licence’s fair value is $500,000 at the end of 2024, the

recoverable amount at the end of 2024 would be $500,000 (since
recoverable amount is the higher of value in use and fair value
less costs to sell). However, the licence cannot be increased in
value to more than what its carrying amount would have been,
net of amortization, if the original loss on impairment had never
been recognized (i.e., $530,000 – $53,000 amortization =
$477,000).

Therefore, carrying amount can be increased to $477,000.

Reversal = $477,000 – $427,500 = $49,500.

Accumulated Impairment Losses–Licences 49,500

Recovery of Loss from Impairment...... 49,500
LO 6,10 BT: AP Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.54 Chapter 12

EXERCISE 12.15

a. Under ASPE, for a limited-life asset, the undiscounted future

cash flows are compared to the carrying amount. In this case,
there is no loss on impairment under ASPE since:
Recoverable amount (undiscounted future cash flows) of
$535,000 > Carrying amount of $530,000

b. Recoverable amount (undiscounted future cash flows) of

$500,000 > Carrying amount of $477,000 ($530,000 – $53,000
amortization) at the end of 2024, therefore there is no loss on
impairment under ASPE.

c. The answer to part b. would not change if the licence’s fair value
is $500,000 because under ASPE, the impairment test compares
carrying amount of the asset to undiscounted future cash flows.
The impairment test is not affected by the fair value of the
licence.

LO 6,10 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.55 Chapter 12

EXERCISE 12.16

a. Under IFRS, indefinite-life intangible assets are tested for

impairment annually (even if there is no indication of
impairment), using the rational entity impairment model (the
same test as for limited-life intangible assets). In this case, the
licence is impaired at the end of 2023 since:
Recoverable amount of $475,000 < Carrying amount of
$530,000.
The loss on impairment of $55,000 would be recorded.
The journal entry under IFRS would be:
Loss on Impairment................................... 55,000
Accumulated Impairment
Losses—Licences ................ 55,000

b. If the estimates used to determine the asset’s value in use and

fair value less costs to sell have changed, then a reversal of the
impairment is recognized if the recoverable amount exceeds
the carrying amount. The reversal amount, however, is limited.
The specific asset cannot be increased in value to more than
what its carrying amount would have been, if the original loss
on impairment had never been recognized.

However, in this case, there is no reversal since the

recoverable amount ($450,000) does not exceed the carrying
amount ($475,000).
Since this asset has an indefinite life, in 2024 there is further
impairment since:
Recoverable amount of $450,000 < Carrying amount of
$475,000.

Solutions Manual 12.56 Chapter 12

EXERCISE 12.16 (CONTINUED)

b. (continued)
A loss on impairment of $25,000 would be recorded.
The journal entry under IFRS would be:
Loss on Impairment................................... 25,000
Accumulated Impairment
Losses—Licences ................ 25,000

c. If the licence’s fair value is $500,000 at the end of 2024, the

recoverable amount at the end of 2024 would be $500,000 (since
recoverable amount is the higher of value in use and fair value
less costs to sell). The licence cannot be increased in value to
more than what its carrying amount would have been, if the
original loss on impairment had never been recognized (i.e.,
$530,000).

Therefore, carrying amount can be increased to $500,000.

Reversal = $500,000 – $475,000 = $25,000.

Accumulated Impairment Losses–Licences 25,000

Recovery of Loss from Impairment...... 25,000

LO 6,10 BT: AP Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.57 Chapter 12

EXERCISE 12.17

a. Under ASPE, indefinite-life intangible assets are tested for

impairment when circumstances indicate that the asset may be
impaired. However, the test differs from the test for limited-life
assets. A fair value test is used, and a loss on impairment is
recorded when the carrying amount exceeds the fair value of the
intangible asset. In this case, the licence is impaired at the end
of 2023 since:

Fair value of $425,000 < Carrying amount of $530,000.

The loss on impairment of $105,000 would be recorded.

The journal entry under ASPE would be:

Loss on Impairment................................... 105,000
Accumulated Impairment
Losses—Licences ................ 105,000

b. Under ASPE, the recoverable amount refers to undiscounted

future cash flows, which does not affect the impairment test for
indefinite-life intangible assets.

c. Under ASPE, reversal of losses on impairment is not permitted.

LO 6,10 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.58 Chapter 12

EXERCISE 12.18

a. December 31, 2023

1
Loss on Impairment .........................................................
550,000
Accumulated Impairment Losses-
Copyrights................................................................550,000

Since the carrying amount of the copyright exceeds the

undiscounted future cash flows, there is impairment. The loss
on impairment is calculated as follows:
1
Carrying amount $2,150,000
Fair value 1,600,000
Loss on impairment $550,000

b. Amortization Expense2.....................................................
160,000
Accumulated Amortization -
Copyrights...........................................................160,000
2
New carrying amount $1,600,000
Useful life  10 years
Amortization per year $ 160,000

c. No entry is necessary. Reversal of losses on impairment is not

permitted under ASPE.

d. The copyright would be tested for impairment after the

adjusting entry for amortization is recorded. The regular
amortization calculation should be done first, prior to testing
for impairment. The amortization expense would be shown as
part of operating expenses (or as part of a product cost)
whereas the loss on impairment would be shown as part of
other expenses and losses. Amortization expense is a
recurring annual expense whereas loss on impairment is only
recorded when the asset is impaired.
LO 6,10 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.59 Chapter 12

EXERCISE 12.19

a. Under IFRS, the recoverable amount is the higher of value in

use and fair value less costs to sell (both of which are
discounted amounts). In this case, the copyright is impaired at
the end of 2023 since:
Recoverable amount of $1,850,000 < Carrying amount of
$2,150,000.
The loss on impairment of $300,000 would be recorded.
The journal entry under IFRS would be:
Loss on Impairment................................... 300,000
Accumulated Impairment
Losses—Copyrights ............. 300,000

b. Amortization for 2024 will be based on the new carrying

amount of $1,850,000, divided over the remaining useful life of
10 years:

Amortization Expense.............................................
185,000
Accumulated Amortization –
Copyrights...................................................... 185,000

Solutions Manual 12.60 Chapter 12

EXERCISE 12.19 (CONTINUED)

c. Reversal of impairment under IFRS:

If the estimates used to determine the asset’s value in use and
fair value less costs to sell have changed, then a reversal of the
impairment is recognized if the recoverable amount exceeds
the carrying amount. The reversal amount, however, is limited.
The specific asset cannot be increased in value to more than
what its carrying amount would have been, net of accumulated
amortization, if the original loss on impairment had never been
recognized.

In this situation, there will be a reversal since:

Recoverable amount of $2,200,000 > Carrying amount
$1,665,000 ($1,850,000 – amortization of $185,000 for 2024).
The reversal will be limited so that the asset’s carrying amount
is not more than what its carrying amount would have been,
net of accumulated amortization, if the original loss on
impairment had never been recognized (i.e., $2,150,000 –
amortization of $215,000 for 2024 = $1,935,000).

The reversal will be limited to $270,000 ($1,935,000 -

$1,665,000), to adjust the carrying amount to $1,935,000 (not
$2,200,000).

The journal entry would be:

Accumulated Impairment Losses-Copyrights......270,000

Recovery of Loss from Impairment 270,000
LO 6,10 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.61 Chapter 12

EXERCISE 12.20

Net assets of Athenian as reported $272,000

Adjustments to fair value
Increase in land value $40,000
Decrease in equipment value (12,000) 28,000
Fair value of identifiable net assets 300,000
Fair value of consideration transferred 382,000
Amount of goodwill to be recorded $82,000

The journal entry to record this transaction is as follows:

Cash..........................................................................
118,000
Land..........................................................................
110,000
Buildings..................................................................
244,000
Equipment................................................................
173,000
Intangible Assets - Copyrights............................... 98,000
Goodwill...................................................................
82,000
Accounts Payable............................................. 92,000
Notes Payable................................................... 351,000
Cash................................................................... 382,000

In reality, only cash equal to the difference would change hands:

$382,000 – $118,000 = $264,000
LO 7 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.62 Chapter 12

EXERCISE 12.21

a. Cash ...................................................................................
75,000
Accounts Receivable........................................................ 114,000
Inventory............................................................................
125,000
Land ...................................................................................
60,000
Buildings...........................................................................
75,000
Equipment.........................................................................
90,000
Goodwill.............................................................................
238,000
Allowance for Expected Credit
Losses.................................................................................... 12,000
Accounts Payable....................................................300,000
Notes Payable..........................................................50,000
Cash..........................................................................415,000

It is likely that only cash of $415,000 – $75,000 = $340,000

would actually change hands.
Note that the buildings and equipment would be recorded at
the 7/1/23 cost to Zoe; accumulated amortization accounts
would not be recognized.

b. Loss on Impairment..........................................................
50,000
Accumulated Impairment Losses-
Goodwill............................................................... 50,000

Carrying amount (incl. goodwill) $500,000

Fair value of reporting unit 450,000
Loss on impairment $50,000

c. Note that a purchase price of $204,000 is less than the fair value
of the net assets of Soorya, resulting in negative goodwill of
$23,000. Current standards require the excess to be recognized
as a gain in net income. However, this cannot be done without a
thorough reassessment of all the variables, values, and
measurement procedures used that resulted in this gain.

Solutions Manual 12.63 Chapter 12

EXERCISE 12.21 (CONTINUED)

c. (continued)

Cash ................................................................................... 75,000

Accounts Receivable........................................................ 114,000
Inventory ........................................................................... 125,000
Land ................................................................................... 60,000
Buildings........................................................................... 75,000
Equipment......................................................................... 90,000
Allowance for Expected Credit
Losses...................................................................................... 12,000
Accounts Payable.................................................... 300,000
Gain.......................................................................... 23,000
Cash.......................................................................... 204,000

d. Impairment test under IFRS

Loss on Impairment1.........................................................
25,000
Accumulated Impairment Losses-
Goodwill...............................................................25,000
1
Carrying amount (incl. goodwill) $500,000
Recoverable amount2 475,000
Loss on impairment $ 25,000
2
Higher of Value in use of $475,000 and Fair value less selling
costs of $425,000 ($450,000-$25,000)

Solutions Manual 12.64 Chapter 12

EXERCISE 12.21 (CONTINUED)

e. Payment of total consideration of $465,000 for Soorya resulted

in payment for goodwill of $238,000. Goodwill is “an asset
representing the future economic benefits arising from other
assets acquired in a business combination that are not
individually identified and separately recognized.” In paying for
goodwill of $238,000, Zoe may have considered the value of
Soorya’s established reputation, good credit rating, top
management team, and/or well-trained employees that make
the value of the business as a whole greater than the fair value
of its identifiable net assets.
LO 7,8,10 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.65 Chapter 12

EXERCISE 12.22

a. December 31, 2023

1
Loss on Impairment .........................................................
44 million
Accumulated Impairment
Losses-Goodwill................................................. 44 million

1
Carrying amount (incl. goodwill) $390 million
Fair value of unit 346 million
Loss on impairment $ 44 million

b. Reversal of losses on impairment is not permitted under ASPE.

c. Impairment under IFRS

Loss on Impairment1.........................................................
5 million
Accumulated Impairment Losses-
Goodwill............................................................... 5 million
2
Carrying amount (incl. goodwill) $390 million
Recoverable amount2 385 million
Impairment loss $5 million
2
Higher of Value in use of $385 and Fair value less selling costs
of $341 ($346 - $5)

d. Reversal of goodwill losses on impairment is not permitted

under IFRS.
LO 8,10 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.66 Chapter 12

*EXERCISE 12.23

Pre-tax accounting income $725,000

Add: Loss from discontinued operations 44,000
769,000
Deduct: Additional depreciation based on
fair value and extended life1 $ 57,500
Unusual, non-recurring gains 152,000 209,500
Normalized earnings $559,500

1
Adjusted depreciation for year on building
$115,000 X 3 X 1/2 (remaining life doubled) $172,500
Less: Depreciation per year based on book
value and original life 115,000
Increase in annual depreciation $ 57,500

The amortization of identifiable intangibles and the profit-sharing

payments to the employees are not part of the income adjustment
because they are recurring expenses.
LO 11 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.67 Chapter 12

*EXERCISE 12.24

a. Fair value of Belgian’s

identifiable net assets $460,000
Normal rate of return X .07
Normal earnings $ 32,200

Belgian’s average earnings for the past 5

years:
2019 $ 75,000
2020 53,000
2021 84,000
2022 87,000
2023 69,000
$368,000

$368,000
Average earnings: = $73,600
5

Average earnings $73,600

Normal earnings (32,200)
Excess earnings $41,400

Goodwill—Capitalization at 23%:
Excess Earnings $41,400
= = $180,000
Capitalization Rate .23

$180,000 should be paid for goodwill. Therefore, Mooney would

pay $460,000 + $180,000 = $640,000 for the company.

b. Goodwill—Capitalization at 18%:
Excess Earnings $41,400 = $230,000
=
Capitalization Rate .18

The payment for the company as a whole would be $460,000 +

$230,000 = $690,000.

Solutions Manual 12.68 Chapter 12

*EXERCISE 12.24 (CONTINUED)

c. Goodwill = 5 X $41,400= $207,000
Price paid for the company = $460,000 + $207,000 = $667,000

d. Using Table A.4:

Present value of the earnings
$41,400 X 3.35216 estimated goodwill $138,779.42
Amount paid for the company = $460,000 + $138,779 = $598,779
Using a financial calculator:
PV ? Yields $138,779.22
I 15%
N 5
PMT $(41,400)
FV 0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $138,779.22
LO 11 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual 12.69 Chapter 12

*EXERCISE 12.25

Richmond’s valuation of $175,000

a.
goodwill = .15 = $1,166,667

Aswan’s valuation of goodwill

Using Table A.4
Present value of earnings $175,000 x 4.56376 ($798,658)
Difference between the calculation of
the two parties $368,009
Using a financial calculator:
PV ? Yields $798,657.39
I 12%
N 7
PMT $(175,000)
FV 0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $798,657.39

Solutions Manual 12.70 Chapter 12

*EXERCISE 12.25 (CONTINUED)

b. Both the seller and the buyer are attempting to determine the
present value of the goodwill, which consists of future
receipts: the annual excess earnings. Because these future
receipts are not contractual in nature, a considerable degree of
uncertainty surrounds their measurement. While both parties
agree on the amount of excess earnings, they disagree as to
the certainty of the continuance of such excess earnings. As a
result, differing risk factors and longevity factors are imputed
with regard to the same base of $175,000 in their valuations of
goodwill. The seller assumes a discount factor of 15% in
perpetuity, while the buyer assumes a risk factor of 12%, but
for seven years only.
LO 11 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.71 Chapter 12

*EXERCISE 12.26

Net assets (based on fair value)

of Grimsby Wine Accessories $ 670,0001
Normal rate of return .15
Normal earnings 100,500
Expected average earnings 140,000
Excess earnings 39,500
Table A.4 factor, 5 years @ 15% 3.35216
Estimated goodwill $132,410

1
Book value as given $590,000
Inventory increase 80,000
Net assets (fair value) $670,000

Fair value of identifiable net assets $670,000

Estimated goodwill 132,410
Estimated fair value of consideration to transfer $802,410
Using a financial calculator:
PV ? Yields $132,410.13
I 15%
N 5
PMT $(39,500)
FV 0
Type 0

Solutions Manual 12.72 Chapter 12

*EXERCISE 12.26 (CONTINUED)

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $132,410.13

LO 11 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.73 Chapter 12

*EXERCISE 12.27

Average earnings over the past 3 years:

Total income for the 3 years $375,000
Add: Loss on discontinued operations 25,000
Deduct: Unusual and non-recurring gain (95,000)
Adjusted total income $305,000

$305,000
Average earnings: = $101,667
3

Average earnings $ 101,667

Rate of return on investment  .25
Total investment $406,668

Total investment $406,668

Less: Goodwill (75,000)
Fair value of the identifiable net assets $331,668

LO 11 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.74 Chapter 12

TIME AND PURPOSE OF PROBLEMS

Problem 12.1

Purpose—to provide the student with an opportunity to determine whether a number

of different items should be capitalized or expensed. Items involved are advertising,
research and development costs, goodwill, legal costs, pre-operating costs, and
promotional costs. In addition, the amount included in the company’s income
statement must be determined.

Problem 12.2

Purpose—the student determines the cost and amortization of a franchise, patent, and
trademark and shows how they are disclosed on the statement of financial position.
The student prepares a schedule of expenses resulting from the intangibles
transactions. The student must also comment on a report to verify revenue amounts
reported. This problem also covers IFRS.

Problem 12.3

Purpose—to provide the student with a comprehensive problem in accounting for

intangible assets. The student is required to adjust the accounts included in a given
trial balance to reflect proper classification and amortization at the end of the second
year of a firm’s operations. The problem is complicated by the fact that proper
adjusting entries were not prepared at the end of the first year, necessitating the
correction of prior year’s errors. The student is required to prepare an eight-column
worksheet to include a trial balance, adjustments, a statement of financial position,
and an income statement. This is an excellent problem to review the accounting
procedures for all types of intangibles in a realistic manner. This problem also covers
IFRS.

Problem 12.4

Purpose—to provide the student with an opportunity to appropriately reclassify

amounts charged to a single intangible asset account. Capitalized in the account are
amounts representing franchise costs, prepaid rent, licence, pre-operating costs,
organization costs, prior net loss, patents, goodwill, royalty expenses, and research
and development costs. The student must also be alert to the fact that several
transactions require an adjustment of Retained Earnings. The problem provides a
good summary of accounting for intangibles.

Solutions Manual 12.75 Chapter 12

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 12.5

Purpose—to provide the student with an opportunity to compute the carrying value of
a patent at three statement of financial position dates. The student must distinguish
between expenditures that are properly included in the patent account and research
and development (R & D) costs that must be expensed as incurred. Computation of
amortization is slightly complicated by additions to the account and a change in the
estimated useful life of the patents. A good summary of accounting for patents and R
& D costs. Contrast of IFRS and ASPE is also included.

Problem 12.6
Purpose—to provide the student with an opportunity to determine income statement
and statement of financial position presentation for costs related to research and
development of patents. The problem calls on the student to determine whether costs
incurred are properly capitalized or expensed. The problem addresses the basic
issues involved in accounting for R & D costs and patents.

Problem 12.7

Purpose—to provide the student with an opportunity to apply the revaluation model
using the asset adjustment method as well as the proportionate method, and to
compare both methods.

Problem 12.8

Purpose—to provide the student with an opportunity to prepare the intangible assets
section of the statement of financial position including an indefinite-life trade name, a
limited-life copyright, and goodwill. Impairment of the intangible assets and goodwill
must also be assessed and recorded. A good review of impairment of the three types
of intangible assets.

Problem 12.9

Purpose—Builds on P12.8 and covers IFRS.

Solutions Manual 12.76 Chapter 12

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 12.10

Purpose—to provide the student with an opportunity to determine the useful life of
various intangible assets. Examples must be provided for testing for impairment of the
various intangibles. The problem deals with applying the criteria for determining useful
life and whether assets have an indefinite useful life by applying the theory.

Problem 12.11

Purpose—to provide an opportunity for the student to determine the amount of

goodwill included in the purchase price of a business. The student must then test
goodwill for impairment assuming two different fair values for the division. The journal
entry for impairment and income statement presentation must also be provided.
Student is required to come up with advice on how to investigate the financial
information of companies in future purchases. This problem also covers IFRS.

Problem 12.12

Purpose—to provide the student with goodwill impairment calculations under IFRS.

*Problem 12.13

Purpose—to provide an opportunity for the student to determine the amount of

goodwill included in the purchase price of a business under four methods. The
methods include capitalization of excess earnings in perpetuity and for a four-year
period, and a purchase of excess earnings for the next four years. The student is also
required to prepare a journal entry reflecting the purchase of the business. The
problem provides practice in the calculation of goodwill.

*Problem 12.14

Purpose—to present the student with an opportunity to determine an amount for

goodwill based on three different methods. The student is then required to write a
letter indicating the possible values and what price might be offered for this potential
acquisition.

Problem 12.15

Purpose—to provide the student with an opportunity to determine the amount of

goodwill in a business combination and to determine the goodwill impairment.

Solutions Manual 12.77 Chapter 12

SOLUTIONS TO PROBLEMS

PROBLEM 12.1

1. Such costs are prohibited from being capitalized as an intangible

asset. The dealer relations program cost of $3,000,000 should be
expensed in the current period because it would be difficult to match
and measure the future benefits. Advertising (marketing) costs must
be expensed as incurred or when the advertising takes place for the
first time. In either case, advertising expense would be charged in the
current period.

2. Pilot plant cost of $5,500,000 is a research and development cost that

should be expensed as incurred. The pilot plant will not be reused
after the experimental work is completed. If any property, plant, or
equipment was purchased, it would be capitalized and depreciated
over its useful life.

3. The reception cost of $12,700 and training costs of $64,400 would be

expensed in the current period.

The wheelchair ramp of $100,000 would be considered an addition to

the building and would be capitalized as part of the building cost. It
would be depreciated over the useful life of the building (or a shorter
period if the ramp is expected to last fewer years).

The uniform cost of $41,600 would be expensed in the current period

since it would have a period of expected benefit of approximately one
year.

Solutions Manual 12.78 Chapter 12

PROBLEM 12.1 (CONTINUED)

4. To record the purchase of Eagle Company, $5,200,000 should be

recorded to identifiable net assets and $800,000 should be
capitalized to goodwill. This transaction represents the acquisition of
a company that should provide future benefits. The goodwill would
not be amortized. The goodwill would be assigned to a cash-
generating unit in order to be tested for impairment. The cash-
generating unit would be reviewed for impairment on an annual basis
and any decline in carrying amount of the cash-generating unit below
recoverable amount would be written off as a loss on impairment.

5. All advertising costs would be expensed.

6. The legal fees for the patent application of $400,000 should be

capitalized as an intangible asset. Amortization of the patent would
be over the patent’s 10-year economic life, or $40,000 annually. The
amount of amortization expense for the patent for the six-month
period November 1, 2022 to April 30, 2023, would be $20,000
($40,000 X 6/12). The net amount of the patent would be $380,000
($400,000 – $20,000) on the April 30, 2023 statement of financial
position.
LO 2,3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.79 Chapter 12

PROBLEM 12.2

a. Naples Corporation
Intangible Assets
December 31, 2023
Franchise, net of accumulated amortization
(Schedule 1) $61,309
Patent, net of accumulated amortization of
(Schedule 2) 11,333
Trademark, net of accumulated amortization of
(Schedule 3) 29,747
Total intangible assets $102,389

Schedule 1 Franchise
Cost of franchise on 1/1/23 ($35,000 + $33,121) $68,121
2023 amortization ($68,121 X 1/10) (6,812)
Cost of franchise, net of amortization $61,309

Schedule 2 Patent
Cost of securing patent on 1/2/23 $13,600
2023 amortization ($13,600 X 1/6) (2,267)
Cost of patent, net of amortization $11,333

Schedule 3 Trademark
Cost of trademark on 7/1/20 $28,600
Amortization, 7/1/20 to 7/1/23 ($28,600 X 3/15) (5,720)
Book value on 7/1/23 22,880
Cost of successful legal defence on 7/1/23 8,160
Book value after legal defence 31,040
Amortization, 7/1/23 to 12/31/23 ($31,040 X 1/12 X 6/12) (1,293)
Cost of trademark, net of amortization $29,747

Solutions Manual 12.80 Chapter 12

PROBLEM 12.2 (CONTINUED)

b. Naples Corporation
Expenses Resulting from Selected Intangible Assets Transactions
For the Year Ended December 31, 2023
Interest expense ($33,121 X 8%) $ 2,650
Franchise amortization (Schedule 1) 6,812
Franchise fee ($800,000 X 5%) 40,000
Patent amortization (Schedule 2) 2,267
Trademark amortization (Schedule 4) 2,246
Total expenses $53,975

Note: The $45,000 of research and development expense incurred in

developing the patent would have been expensed prior to 2023.

Schedule 4 Trademark Amortization

Amortization, 1/1/23 to 6/30/23 ($28,600 X 1/15 X 6/12) $ 953
Amortization, 7/1/23 to 12/31/23 (Schedule 3) 1,293
Total trademark amortization $2,246

c. Under IFRS, the response would be similar. The company can

choose to use the revaluation method for its subsequent accounting if
an active market exists for the intangible assets.
d. Naples can request a special report from their auditors. The special
report can provide audit assurance on the revenue total. The auditors
would likely base their materiality calculation on the revenue line item
and focus their work on this line item. The special report would be in
accordance with CAS (Canadian Audit Standards) 805. Alternatively,
the franchisor may accept a lower level of assurance such as a
review of the revenue amount. Materiality would be the same as that
used for the 805 report since the user has not changed. Naples may
also provide a special report that focuses on compliance with the
terms of the franchise agreement. This report can be prepared by
performing an audit or a review. Naples should confirm with the
franchisor which report meets their needs.
LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.81 Chapter 12

PROBLEM 12.3

a.
Gelato Corporation
Year Ended December 31, 2023
Journal Entries
(Not required)

-1-
Machinery...........................................................................
40,700
Intangible Assets - Patents 40,700
To transfer cost of improving machinery
to a PP&E account

-2-
Amortization Expense.........................................................
5,147
Accumulated Amortization - Patents.......................... 5,147
To record 2023 patent amortization:
1/17 X ($87,500) = $5,147

-3-
1
Loss on Impairment ...........................................................
27,353
Accumulated Impairment Losses-Patents................. 27,353
1. Compare carrying amount with
undiscounted future net cash flows:
($87,500 – $5,147 = $82,353) and
$80,000). Patent is impaired
2. 1carrying amount – fair value:
$82,353 – $55,000 = $27,353

Solutions Manual 12.82 Chapter 12

PROBLEM 12.3 (CONTINUED)

a. (continued)

-4-
Retained Earnings ($60,000 / 15) ......................................
4,000
Accumulated Amortization - Licences (re 4,000
Licensing Agreement No. 1)

-5-
Retained Earnings..............................................................
33,600
Accumulated Impairment Losses-Licences............... 33,600

To write off the permanent 60% reduction in the expected

revenue-producing value of licensing agreement No. 1
caused by the late December 2022 explosion [($60,000 –
$4,000) X 60% = $33,600].

-6-
Amortization Expense.........................................................
1,600
Accumulated Amortization - Licences 1,600
($60,000 – $4,000 – $33,600)/14 = $1,600
rounded re Licensing Agreement No. 1

-7-
Intangible Assets – Licences............................................
4,000
Unearned Revenue................................................... 4,000
To classify revenue received in advance on licensing agreement as
unearned revenue re Agreement No.2

Solutions Manual 12.83 Chapter 12

PROBLEM 12.3 (CONTINUED)

a. (continued)
-8-
Amortization Expense.........................................................
12,000
Accumulated Amortization - Licences............................ 12,000
To record 2023 amortization of licensing agreement No. 2
(1/5 X $60,000)

-9-
Retained Earnings..............................................................
30,000
Goodwill.......................................................................... 30,000
To expense incorporation costs improperly charged to Goodwill

-10-
Equipment...........................................................................
15,000
Accounts Receivable.......................................................... 6,100
Leasehold Improvements.......................................... 21,100
To charge the equipment account with movable equipment and to
record a receivable from the landlord for the real estate taxes paid by
Gelato

-11-
Depreciation Expense.........................................................
1,500
Retained Earnings..............................................................
1,500
Accumulated Depreciation - Leasehold
Improvements.......................................................... 3,000
To record 2022 and 2023 amortization of leasehold improvements
based on 10-year life of lease (2 X 10% X $15,000)

-12.
Research and Development Expense................................ 90,000
Selling Expenses........................................................ 90,000
Salaries of $55,000 (110,000 x 50%) + materials consumed of $35,000

Solutions Manual 12.84 Chapter 12

PROBLEM 12.3 (CONTINUED)

a. (continued)

Trial Balance Adjustments Income Statement SFP

General Ledger Account Debit Credit Debit Credit Debit Credit Debit Credit
Cash $57,000 $57,000
Accounts Receivable 87,000 $6,100 (10) 93,100
Allowance for Doubtful
Accounts $1,500 $1,500
Inventory 60,200 60,200
Machinery 82,000 40,700 (1) 122,700
Equipment 37,000 15,000 (10) 52,000
Accumulated
Depreciation – Mach. 16,200 16,200
Accumulated
Depreciation – Equip. 10,000 10,000
Intangible Assets -
Patents 128,200 (1) $40,700 87,500
Leasehold
Improvements 36,100 (10) 21,100 15,000
Prepaid Expenses 13,000 13,000
Goodwill 30,000 (9) 30,000 0
Intangible Assets -
Licences 116,000 4,000 (7) 120,000
Accounts Payable 93,000 93,000
Unearned Revenue 17,280 (7) 4,000 21,280
Common Shares 300,000 300,000

Solutions Manual 12.85 Chapter 12

PROBLEM 12.3 (CONTINUED)

a. (continued)
Income
Trial Balance Adjustments Statement SFP
General Ledger
Account Debit Credit Debit Credit Debit Credit Debit Credit

Retained earnings,
January 1, 2023 173,020 4,000 (4)
33,600 (5)
30,000 (9)
1,500 (11) 103,920

Sales 720,000 720,000

Cost of Goods
Sold 475,000 475,000
Selling Exp. 180,000 (12) 90,000 90,000
Interest Exp. 29,500 29,500

Totals $1,331,000 $1,331,000

Solutions Manual 12.86 Chapter 12

PROBLEM 12.3 (CONTINUED)

a. (continued) Income
Adjustments Statement SFP
Debit Credit Debit Credit Debit Credit

Research and Development 90,00

Expense 90,000 (12) 0
Acc. Amort. – Patents (2) 5,147 5,147
Acc. Imp. Losses– Patents (3) 27,353 27,353
Acc. Dep. - Leasehold
Improvements (11) 3,000 3,000
Acc. Amort. Licences
(4) 4,000
(6) 1,600
(8) 12,000 17,600
Loss on Impairment 27,353 (3) 27,353
Acc. Imp. Losses. –
Licences (5) 33,600 33,600
Depreciation Expense 1,500 (11) 1,500
Amortization Expense 5,147 (2)
1,600 (6)
12,000 (8) 18,747
$272,500 $272,500 732,100 720,000 620,500 632,600
Net loss for 2023 12,100 12,100
Totals $732,100 $732,100 $632,600 $632,600

Solutions Manual 12.87 Chapter 12

PROBLEM 12.3 (CONTINUED)

b.
Gelato Corporation
Statement of Financial Position
December 31, 2023

Assets
Current assets
Cash $57,000
Accounts receivable $93,100
Less allowance for doubtful
accounts (1,500) 91,600
Inventory 60,200
Prepaid expenses 13,000
Total current assets $221,800

Property, plant, and equipment

Machinery 122,700
Less accumulated depreciation (16,200) 106,500

Equipment 52,000
Less accumulated depreciation (10,000) 42,000

Leasehold improvements 15,000

Less accumulated depreciation (3,000) 12,000
Total property, plant, and equipment 160,500

Intangible assets
Patents 87,500
Less accumulated amortization
and impairment losses1 (32,500) 55,000
Licensing agreements 120,000
Less accumulated amortization
and impairment losses2 (51,200) 68,800
Total intangible assets 123,800
Total assets $506,100

1
$5,147 + $27,353
2
$17,600 + $33,600

Solutions Manual 12.88 Chapter 12

PROBLEM 12.3 (CONTINUED)

b. (continued)

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $ 93,000
Unearned revenues 21,280
Total current liabilities $ 114,280

Shareholders’ equity
Share capital
Common shares 300,000
Retained earnings 91,820
Total shareholders’ equity 391,820
Total liabilities and
shareholders’ equity $506,100

Gelato Corporation
Income Statement
For the Year Ended December 31, 2023

Sales $720,000
Cost of goods sold 475,000
Gross profit 245,000
Operating expenses
Selling expenses $90,000
Research and development expenses 90,000
Amortization expense 18,747
Depreciation expense 1,500 200,247
Income from operations 44,753
Other expenses and losses
Interest expense 29,500
Loss on impairment 27,353 56,853
Loss before income tax (12,100)
Income tax expense or recovery3 xxxx
Net loss $(12,100)

3
Note to instructor: the income tax expense would usually be shown here.

Solutions Manual 12.89 Chapter 12

PROBLEM 12.3 (CONTINUED)

c. Reporting under IFRS

The impairment test for the patent would be different under
IFRS:
Recoverable amount = higher of value in use and fair value
less selling costs
= higher of ($75,000) or ($55,000 – $5,000)
= $75,000

Carrying value = $87,500 – $5,147 = $82,353

Loss on impairment = $75,000 – $82,353 = $7,353

LO 2,4 BT: AP Difficulty: C Time: 70 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.90 Chapter 12

PROBLEM 12.4

a.
Intangible Assets – Franchises........................................... 35,000
Prepaid Rent.......................................................................
25,000
Retained Earnings .............................................................
17,000
Intangible Assets - Patents ($65,400 + $13,350) ............... 78,750
Intangible Assets – Licences.............................................. 86,000
Research and Development Expense................................ 75,000
Goodwill ($287,500 – $175,000) ........................................ 112,500
Intangible Assets - Development Costs............................. 175,000
Royalties Expense..............................................................
2,775
Intangible Assets....................................................... 607,025
To clear Intangible Assets account

Amortization Expense ($35,000  8) ..................................

4,375
Retained Earnings ($35,000  8 X 6/12) ............................
2,188
Accumulated Amortization - Franchises.................... 6,563
To correct for amortization on franchises

Rent Expense ($25,000  2) ..............................................

12,500
Retained Earnings ($25,000  2 X 3/12) ............................ 3,125
Prepaid Rent.............................................................. 15,625
To correct for rent payments

Amortization Expense1........................................................
6,525
Accumulated Amortization – Patents......................... 6,525
1
($65,400 X 10.5/120 months) +
($13,350 X 7/116.5 months)
To record amortization expense on patents

Amortization Expense2........................................................
14,333
Accumulated Amortization - Licences........................ 14,333
2
($86,000  5 X 10/12)
To record amortization expense on licences

Solutions Manual 12.91 Chapter 12

PROBLEM 12.4 (CONTINUED)

a. (continued)

Amortization Expense3........................................................
13,125
Accumulated Amortization –
Development Costs ............................................. 13,125
3
($175,000  10 X 9/12)
To record amortization expense on development
costs
b. Goodwill is only recognized in the financial statements if the
goodwill was purchased in a business combination. Therefore,
its reported value, if any, would be the result of a verifiable
transaction with an arm’s length party, and any subsequent
impairment testing is conducted according to generally
accepted accounting principles. An investor will understand that
goodwill is a result of acquiring another business with
unidentifiable value in excess of the target business’s fair value
of identifiable net assets, and that the entity is expected to
benefit from this unidentifiable value. This is useful information
for an investor. Recognizing goodwill separately from intangible
assets allows investors to see the carrying amount of recorded
goodwill (which is not an identifiable asset, and is not
amortized), separate from the carrying amount of intangible
assets (which are identifiable assets that are amortized if they
have limited lives).
LO 2,4,7 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.92 Chapter 12

PROBLEM 12.5

a. Costs to obtain patent Jan. 2017........................ $59,500

)
2017 amortization ($59,500 ÷ 17).......................(3,500)
Carrying value, 12/31/17....................................
$56,000

The cost of research to develop the precipitator, and the

salaries of research staff, incurred prior to January 2017 are
related to research and development activities and were
expensed as incurred in accordance with IFRS. The design and
construction of the prototype on Jan. 3, 2016 was capitalized
as a development cost and amortized.

b. 1/1/18 carrying value of patent............................................

$56,000
(

2018 amortization ($59,500 ÷ 17).......................................

$3,500
2019 amortization...............................................................
3,500 (7,000)
49,000
Legal fees to defend patent 12/19......................................42,000
Carrying value, 12/31/19.....................................................91,000
2020 amortization ($91,000 ÷ 14).......................................
6,500
2021 amortization...............................................................
6,500 (13,000)
Carrying value, 12/31/21..................................................... $78,000

The costs incurred in 2018 and 2020 are related to research

and development activities and are expensed as incurred. The
engineering activity to advance the design of the precipitator of
Nov. 2018 did not meet all of the criteria for capitalization,
therefore, the amount was expensed.

Solutions Manual 12.93 Chapter 12

PROBLEM 12.5 (CONTINUED)

c. 1/1/22 carrying value..........................................................

$78,000
(

2022 amortization ($78,000 ÷ 5).........................................

$15,600
2023 amortization...............................................................
15,600
2024 amortization...............................................................
15,600 (46,800)
Carrying value, 12/31/24..................................................... $31,200

The legal costs in 2024 were expensed because the suit was
unsuccessful. It is assumed that the failure to defend the patent
did not affect the remaining useful life for purposes of
amortization.

The answer would be the same if ASPE were followed.

LO 2,4 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.94 Chapter 12

PROBLEM 12.6

a. Income statement items and amounts for the year ended

December 31, 2023:

Research and Development Expense1 $185,167

Amortization of patent ($102,500  10 years) 10,250
1
The research and development expense could be listed by the
components rather than in one total. The details of the research
and development expense is as follows:
Depreciation—building
($185,000  15 years) X 50% $ 6,167
Salaries and employee benefits
($87,000 + $52,500) 139,500
Other expenses ($21,000 + $18,500) 39,500

Total research and development expense $185,167

Development costs capitalized in 2023

Salaries and benefits $125,000
Other expenses 81,000
Depreciation of building 6,167
Total $212,167

Statement of financial position items and amounts as at December

31, 2023:
Land $ 61,000
Building (net of accumulated depreciation of
$12,333) 172,667
Intangible Assets - Patents (net of accumulated
depreciation of $17,938)2 84,562
Intangible Assets - Development costs 212,167

2
([$102,500  10] X 3/4) + ($102,500  10)

Solutions Manual 12.95 Chapter 12

PROBLEM 12.6 (CONTINUED)

a. (continued)

Research and development costs should be charged to

expense when incurred, except for those expenditures that
meet the six development phase criteria for capitalization,
including managerial intent to complete, and financial and
technical viability.

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.

b. For costs to qualify as development costs to be capitalized, the

company must be able to demonstrate that the following
conditions have been met:
1. Technical feasibility of completing the project
2. Entity’s intention to complete it to use or sell
3. Entity’s ability to use or sell it
4. Availability of technical, financial, and other resources
needed to complete it, and to use or sell it
5. The way in which the future economic benefits will be
received, including the existence of a market for the asset if
it will be sold, or for its usefulness to the entity if it will be
used internally
6. Ability to reliably measure the associated costs attributable
to the asset during development
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.96 Chapter 12

PROBLEM 12.7

a. January 2, 2023
Intangible Assets – Licences1.............................................
411,400
Cash.......................................................................... 411,400
1
22 X $18,700 = $411,400

b. Revaluation model
(Asset adjustment method)

December 31, 2024

Amortization Expense2........................................................
51,425
Accumulated Amortization –
Licences............................................................... 51,425
2
$411,400 / 8 yrs. = $51,425
To record amortization expense

Accumulated Amortization –Licences3.......................

102,850
Intangible Assets - Licences............................. 102,850
3
$51,425 + $51,425 = $102,850
To eliminate accumulated amortization-licences balance

The Intangible Assets – Licences account is now $411,400 -

$102,850 = $308,550, and the related Accumulated Amortization
account is zero.

Revaluation Gain or Loss4.........................................

125,950
Intangible Assets - Licences............................. 125,950
4
$308,550 – ($8,300 X 22) = $125,950
To adjust Intangible Assets – Licences account to fair value

Carrying amount of Intangible Assets - Licences as at

December 31, 2024 = $182,600 ($8,300 X 22 or $308,550 -
$125,950).
There would be no loss on impairment at December 31, 2024
because the value in use is higher than the fair value of the
asset.
Solutions Manual 12.97 Chapter 12
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 12.7 (CONTINUED)

b. (continued)

December 31, 2025

Amortization Expense5...............................................
30,433
Accumulated Amortization -
Licences........................................................... 30,433
5
$182,600 / 6 yrs. = $30,433
To record amortization expense

December 31, 2026

Amortization Expense.........................................................
30,433
Accumulated Amortization -
Licences............................................................... 30,433
To record amortization expense

Accumulated Amortization –Licences6 60,866

Intangible Assets - Licences............................. 60,866
6
$30,433 + $30,433 = $60,866
To eliminate Accumulated Amortization-Licences balance

The Intangible Assets – Licences account is now $182,600 -

$60,866 = $121,734, and the related Accumulated Amortization
account is zero.

Intangible Assets – Licences7....................................

252,266
Revaluation Gain or Loss................................. 125,950
Revaluation Surplus (OCI)............................... 126,316
7
($17,000 X 22) - $121,734 = $252,266
To adjust Intangible Assets – Licences account to fair value

The carrying amount of the licences at December 31, 2026 is

$17,000 X 22 = $374,000, or $121,734 + $252,266 = $374,000.

Solutions Manual 12.98 Chapter 12

PROBLEM 12.7 (CONTINUED)

c. Revaluation model
(Proportionate method), Dec. 31, 2024

Amortization Expense8........................................................
51,425
Accumulated Amortization -
Licences............................................................... 51,425
8
$411,400 / 8 yrs. = $51,425
To record amortization expense

Proportional
Before after
revaluation revaluation
(A) (B) (B) – (A)
Int. Assets - X
Licences 182,600 /
$(167,933)
$411,400 308,550 $243,467
Accumulated X
amortization 182,600 / 41,983
102,8509 308,550 60,867
Carrying amount $308,550 $182,600 $(125,950)
9
$51,425 X 2

Accumulated Amortization – Licences............................ 41,983

Revaluation Gain or Loss................................................
125,950
Intangible Assets - Licences...................................... 167,933
To adjust Intangible Assets – Licences account to fair value

December 31, 2025

Amortization Expense10...................................................
30,433
Accumulated Amortization – Licences........................ 30,433
10
$182,600 / 6 yrs. = $30,433
To record amortization expense

Solutions Manual 12.99 Chapter 12

PROBLEM 12.7 (CONTINUED)

c. (continued)

December 31, 2026

Amortization Expense.........................................................
30,433
Accumulated Amortization – Licences............................ 30,433
To record amortization expense

Proportional
Before after
revaluation revaluation
(A) (B) (B) – (A)
Int. Assets - X 374,000 /
Licences $243,467 121,734 $747,997 $504,530
Accumulated X 374,000 /
amortization 121,73311 121,734 373,997 (252,264)
Carrying amount $121,734 $374,000 $252,266
11
$60,867 + $30,433 X 2 = $121,733

Intangible Assets - Licences........................................

504,530
12
Revaluation Gain or Loss ................................... 125,950
Revaluation Surplus (OCI)................................... 126,316
Accumulated Amortization -
Licences........................................................... 252,264
To adjust Intangible Assets – Licences account to fair value
12
The increase in carrying amount is recorded as a credit to
Revaluation Surplus (OCI), unless the increase reverses a
revaluation decrease previously recognized in income. If so,
the increase is recognized in income to the extent of the prior
decrease. In this example, $125,950 revaluation loss was
recorded in income on December 31, 2024. Since there is an
increase in carrying amount in excess of this amount on
December 31, 2026, a $126,316 revaluation gain is recorded in
other comprehensive income on December 31, 2026.

Solutions Manual 12.100 Chapter 12

PROBLEM 12.7 (CONTINUED)

c. (continued)

The carrying amount of the licences at December 31, 2026 is

$17,000 X 22 = $374,000, or $747, 997 - $373,997.
d. The effects on the statement of comprehensive income are the
same under both the asset adjustment method and the
proportionate method. However, the effects on the statement of
financial position are different under each method. Under the
asset adjustment method, the Intangible Assets – Licences
account balance is the fair value of the licences at each
revaluation date, and the related Accumulated Amortization–
Licences account balance is zero. Under the proportionate
method, the Intangible Assets–Licences account balance and
the related Accumulated Amortization–Licences account
balance are proportionately adjusted to reflect the new carrying
amount, which is equal to the fair value of the licences at each
revaluation date. An investor would likely prefer that
Aquaculture use the proportionate method to apply the
revaluation method, because the proportionate method
presents an adjusted balance in the accumulated amortization
account (versus presenting a zero balance in the accumulated
amortization account, as under the asset adjustment method).
This provides information about the relative age of the licences.

LO 4 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.101 Chapter 12

PROBLEM 12.8

a. Meridan Golf and Sports

INTANGIBLES and GOODWILL SECTION OF
STATEMENT OF FINANCIAL POSITION
December 31, 2023
Trade name $ 15,000
Copyright (net of accumulated amortization of $313)
(Schedule 1) 24,687
39,687
Goodwill (Schedule 2) 50,000

Schedule 1 Calculation of Copyright

Cost of copyright at date of purchase $25,000
Amortization of Copyright for 2023
[($25,000 ÷ 40) X 1/2 year] (313)
Carrying amount of copyright at December 31 $24,687

Schedule 2 Goodwill Measurement

Fair value of consideration transferred $650,000
Fair value of identifiable assets $700,000
Fair value of identifiable liabilities (100,000)
Fair value of net identifiable assets 600,000
Value assigned to goodwill $50,000

Amortization expense for 2023 is $313 (see Schedule 1). There is no

amortization for the goodwill or the trade name, which are considered
to have indefinite lives.

Solutions Manual 12.102 Chapter 12

PROBLEM 12.8 (CONTINUED)

b.
Amortization Expense...............................................
625
Accumulated Amortization -
Copyright ($25,000 ÷ 40).................................. 625

There is a full year of amortization on the copyright. There is no

amortization for the goodwill or the trade name, which are considered
to have indefinite lives.

Meridan Golf and Sports

INTANGIBLES and GOODWILL SECTION OF
STATEMENT OF FINANCIAL POSITION
December 31, 2024
Trade name $ 15,000
Copyright (net of accumulated amortization of $938)
(Schedule 1) 24,062
39,062

Goodwill 50,000

Schedule 1 Calculation of Copyright

Cost of Copyright at date of purchase $25,000
Amortization of Copyright for 2023, 2024
[($25,000 ÷ 40) X 1.5 years] (938)
Carrying amount of copyright at December 31 $24,062

c.
Loss on Impairment...........................................................
20,000
Accumulated Impairment Losses –
Goodwill ............................................................. 13,000
Accumulated Impairment Losses– Trade
Name ................................................................ 7,000
Calculations follow in Schedule 2

Solutions Manual 12.103 Chapter 12

PROBLEM 12.8 (CONTINUED)

c. (continued)

Schedule 2
Indefinite-life intangibles and goodwill:

Carrying
amount Fair Value Impairment
Trade Name $15,000 $8,000 $7,000
Reporting Unit: 450,000
Trade Name
Impairment 7,000
443,000 430,000 13,000

Limited-life
intangibles:

Carrying Undiscounted Impairment

amount cash flows
1
Copyright $23,438 $30,000 0

1
[$25,000 - ($25,000 ÷ 40 years x 2.5 years)]

LO 6,8 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.104 Chapter 12

PROBLEM 12.9

Recoverable
Amount (higher
Carrying of VIU or FV-
amount SC1) Impairment
Trade Name $15,000 $ 7,500 $7,500
Copyright 23,438 27,000 0
Cash
generating unit 450,000
to which (7,500)
Goodwill was 442,500 440,000 2,500
allocated
1
VIU – Value in use and FV-SC – Fair value less selling costs

The impairment test for the identifiable assets would be performed

first, and then the carrying amount of the CGU would be compared to
its recoverable amount. The result, if the carrying amount > the
recoverable amount, would be the loss on impairment – first
assigned to goodwill with any remainder then allocated among the
other assets on a relative book value basis.

Loss on Impairment ..........................................................

10,000
Accumulated Impairment Losses-Goodwill ............ 2,500
Accumulated Impairment Losses-Trade
Names................................................................ 7,500
LO 6,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.105 Chapter 12

PROBLEM 12.10
a. and b.
1. (i) The trade name has a remaining legal life of 16 years and
can be renewed at a reasonable cost. There appears to be
reasonable assurance that the economic benefits of the
trade name will continue indefinitely because positive cash
flows can be identified for 25 years and are expected to
continue. Accordingly, the asset would not be amortized. It
would be tested for impairment at least on an annual basis
(or more often if circumstances dictate).

(ii) The useful life to the enterprise is three years, so the trade
name should be checked for the need for amortization over
the three-year period. Any amortization would be based on
the cost of the trade name less any residual value. The
residual value, usually assumed to be zero for intangibles, is
expected in this case to be substantial – the trade name will
continue to have value and a useful life to another
enterprise. Powers expects to have no problem in selling
the subsidiary at the end of the three years. If Powers
determines that the residual value after three years is equal
to or greater than its cost to Powers, no amortization would
be necessary.

The trade name would be tested for impairment if conditions

indicate that the estimated future net cash flow may be less
than its carrying amount. These conditions would include,
for example, a loss from operation of the asset; negative
cash flows from the asset; changes in external economic
conditions; a substantial decline in the market for the
product; and a decline in net realizable value of the asset
below the net carrying amount.

Solutions Manual 12.106 Chapter 12

PROBLEM 12.10 (CONTINUED)

2. The licence has a legal life of five years and can be renewed
indefinitely at a reasonable cost. There appears to be
reasonable assurance that the economic benefits of the
licence will continue indefinitely because it is expected to
generate positive cash flows indefinitely. Accordingly, the
asset would not be amortized. It would be tested for
impairment at least on an annual basis (or more often if
circumstances dictate).

3. The magazine subscription list should be amortized over its

estimated useful life of 25 years. An indefinite useful life was
not selected in this case due to the nature of the intangible
asset. Although Powers may intend to add customer names
and other information to the list in the future, the expected
benefits of the acquired subscription list apply only to the
customers on that list at the date of acquisition. The
magazine subscription list would be tested for impairment if
conditions indicate that the estimated future net cash flows
may be less than its carrying amount, caused by, for
example, a substantial decline in the market for the product.

4. The non-competition covenant should be amortized over its

estimated useful life of 25 years. An indefinite useful life was
not selected in this case since the projected cash flows are
expected to continue for 25 years, but there is no mention of
usefulness beyond this point. The non-competition covenant
would be tested for impairment if conditions indicate that the
estimated future net cash flows may be less than its carrying
amount, caused by, for example, a substantial decline in the
market for the product, making the non-competition
covenant irrelevant.

Solutions Manual 12.107 Chapter 12

PROBLEM 12.10 (CONTINUED)

5. The medical files should be amortized over their estimated

useful life. An indefinite useful life was not selected in this
case due to the nature of the intangible asset. The issue is
similar to the magazine subscription list in that, although
Powers may intend to add clients to the list in the future, the
expected benefits of the acquired medical files apply only to
the clients on that list at the date of acquisition. An estimate
of useful life could be determined based on the average life
expectancy and retention of the clients. The medical files
would be tested for impairment if conditions indicate that the
estimated future net cash flow may be less than its carrying
amount, caused by, for example, a loss of clients from the
purchased practice.

6. The favourable lease should be amortized over 35 years.

The useful life could be reduced by factors such as lease
contract provisions owing to Powers being a sub-lessor;
Powers’ intended period of lease of the warehouse; and, the
effect of economic factors on rentals in the area. The
favourable lease would be tested for impairment if conditions
indicate that the estimated future net cash flow may be less
than its carrying amount, caused by, for example, decreases
in area rental rates.
LO 5,6 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.108 Chapter 12

PROBLEM 12.11

a. Fair value of consideration transferred $2,000,000

Less fair value of identifiable net assets 1,700,000
Goodwill $300,000

b. The fair value of the Lubello Division of $1,850,000 exceeds

the carrying amount of the Division including goodwill of
$1,628,500. As a result, no loss on impairment is recognized.

c. The carrying amount of the Division including goodwill of

$1,628,500 exceeds its fair value of $1,500,000, therefore
goodwill is considered impaired by $128,500.

d. Loss on Impairment.................................................
128,500
Accumulated Impairment
Losses-Goodwill........................................ 128,500

The loss would be reported separately in the income

statement before taxes and discontinued operations.

e. Under IFRS, goodwill is allocated to a cash-generating unit

(CGU), and the CGU is tested for impairment annually and
whenever circumstances indicate the CGU may be impaired.
Loss on impairment, if any, is calculated as the excess of the
CGU’s carrying amount over its recoverable amount (higher of
VIU and FV-SC). Any loss on impairment is first allocated to
goodwill and then to other assets in the CGU on a proportional
basis. Reversal of goodwill loss on impairment is not permitted.

Solutions Manual 12.109 Chapter 12

PROBLEM 12.11 (CONTINUED)

f. In the future, should Mona Ltd. be considering another

business acquisition, it should perform due diligence work prior
to any purchase, possibly with the assistance of an
independent auditor and/or business valuator. This includes
looking beyond the financial information, for example, the
physical condition of the equipment, the age and currency of
the IT system, and any existing agreements, such as union
agreements. The financial statements of the business being
acquired should be audited so that the quality of the earnings
can be tested. The company should look at the earnings in
more detail to identify any unusual items or one-time events
that are boosting the earnings figure used in negotiating the
purchase price. If a budget of future earnings and cash flows is
presented, the assumptions used in these projections should
be scrutinized carefully.

LO 7,8 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.110 Chapter 12

PROBLEM 12.12

a. Goodwill calculation
Fair value of consideration transferred $763,000
Fair value of assets $1,080,000
Fair value of liabilities 430,000
Fair value of net assets 650,000
Value assigned to goodwill $113,000

b. The recoverable amount of the CGU is compared with the

carrying amount of the CGU to determine if there is any
impairment.

Based on the information provided, the recoverable amount is

the higher of:
- FV – selling costs = $4,250,000
- VIU = $3,850,000
Recoverable amount of CGU $4,250,000
Carrying value of CGU 4,613,000
Loss on impairment 363,000

The loss on impairment of $363,000 exceeds the amount of

goodwill. Therefore, the loss on impairment should be allocated
to reduce the CGU’s carrying amount in the following order:
first to goodwill, then the remainder to the other assets in the
CGU on a proportionate basis, based on relative carrying
amount.

Solutions Manual 12.111 Chapter 12

PROBLEM 12.12 (CONTINUED)

b. (continued)

After recording the loss on impairment, the CGU’s carrying amount

will be as follows:

Plant A CGU Adjusted

Loss on
carrying carrying
amount Impairment amount

Assets (other than

goodwill) $4,500,000 $(250,000) $4,250,000

Goodwill 113,000 (113,000) 0

Total carrying amount

of CGU $4,613,000 $(363,000) $4,250,000

c. If there is a subsequent reversal of impairment, the goodwill loss

on impairment cannot be reversed; any future reversal will be
limited to the writedown of the other assets ($250,000).

LO 7,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.112 Chapter 12

*PROBLEM 12.13

a. Net assets at current value

Current assets ($125,000 + $40,000) $165,000
FV-NI investments ($55,000 + $20,000) 75,000
Buildings (net) 405,000
Current liabilities (85,000)
Notes payable (105,000)
Net assets 455,000
X 15%
Normal earnings $68,250

Project net income

Base for 2023: $110,000
2024 ($110,000 X 1.15) $126,500
2025 ($126,500 X 1.15) 145,475
2026 ($145,475 X 1.15) 167,296
2027 ($167,296 X 1.15) 192,390
$631,661  4 = $157,915

1. Average earnings next four years $157,915

Normal earnings (68,250)
Excess earnings $ 89,665

$89,665 X 4 = $358,660
$358,660 + $455,000 (net assets) = $813,660

2. $89,665  30% = $298,883

$298,883 + $455,000 (net assets) = $753,883

3. $89,665 X 2.854981 = $255,992

$255,992 + $455,000 net assets = $710,992
1
Table A.4 annuity factor, n=4, i=15

Solutions Manual 12.113 Chapter 12

*PROBLEM 12.13 (CONTINUED)

a. 3. (continued)
Using a financial calculator:
PV ? Yields $255,991.63
I 15%
N 4
PMT $(89,665)
FV 0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $255,991.63

4. $89,665  16% = $560,406

$560,406 + $455,000 (net assets) = $1,015,406

Solutions Manual 12.114 Chapter 12

*PROBLEM 12.13 (CONTINUED)

b. Since the value of the company is estimated to be between

$710,992 and $1,015,406, Yardon Appraisal should likely
advise Macho not to purchase De Fuentes SA for this price
since three of the estimates result in a value for the business
that is well under $1,000,000; the fourth estimate is just slightly
above the asking price of $1,000,000. Yardon Appraisal should
suggest that Macho ask for audited financial statements and
should consider any bias or accounting policies that De
Fuentes SA may have used when preparing their financial
statements.

c. The entry on Macho’s books would be:

165,000
Current Assets................................................................
75,000
FV-NI Investments..........................................................
405,000
Buildings..........................................................................
395,000
Goodwill..........................................................................
Current Liabilities....................................................... 85,000
Notes Payable........................................................... 105,000
Cash.......................................................................... 850,000

LO 11 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.115 Chapter 12

*PROBLEM 12.14

a. Balloon Bunch Corporation

Calculation of Goodwill and Purchase Price
As of December 31, 2023

Goodwill
1. Excess Earnings Approach:
Earnings for past 5 years $350,000
Average Earnings ($350,000/5) $ 70,000
Normal Earnings ($400,000 X .15) (60,000)
Excess Annual Earnings $ 10,000
Excess Earnings Capitalized (Goodwill)
@ 20% for 6 years (PVA6, 20%) ($10,000*PVAF) $ 33,255

Purchase Price = $33,255 + $400,000 = $433,255

2. Number of Years Method:

Excess Annual Earnings $ 10,000
Number of Years Estimated to Continue 6
Goodwill $ 60,000

Purchase Price = $60,000 + $400,000 = $460,000

3. Times Average Earnings:

Average Yearly Earnings $ 70,000
Number of Times Paid-Similar Companies 5
Total Value of Company $350,000
Less: Fair Value of Net Assets (400,000)
Negative goodwill $ (50,000)

Purchase price = $(50,000) + $400,000 = $350,000

Solutions Manual 12.116 Chapter 12

*PROBLEM 12.14 (CONTINUED)

b. Dear Ms. Lima:

I have analyzed the information you provided to me on Balloon

Bunch Corporation (Balloon) and have compiled information to
help you decide how much to offer the sellers. The analysis
includes calculations of goodwill.

Goodwill is an asset that represents the excess of the purchase

price paid for a company over the fair value of the identifiable
assets (net of liabilities) in an arm’s-length transaction.
Goodwill arises because a company has better-than-average
earnings, a good reputation, an excellent management team,
effective advertising, or other qualities that make a buyer willing
to spend more than the fair value of the identifiable net assets
to acquire the company.

There are several ways to calculate goodwill for a company. I

have prepared the attached Calculation of Goodwill and
Purchase Price to demonstrate three ways to calculate
Balloon’s goodwill. The first is the excess earnings approach.
Excess earnings are defined as the difference between the
average earnings of the corporation and the industry’s average
earnings for the same net assets. Under this approach, the
average of the company’s past net earnings is used to find the
average annual earnings of $70,000.

Companies in the balloon industry average a 15 percent rate of

return on their net assets. If Balloon averaged 15 percent on its
net assets, its normal earnings would be $60,000. Therefore,
Balloon earns $10,000 per year more than similar competitors.
Based on current economic conditions, fluctuations in annual
earnings, and other considerations, excess earnings should be
capitalized at a conservative 20% rate. This indicates that the
goodwill would be $33,255.

Solutions Manual 12.117 Chapter 12

*PROBLEM 12.14 (CONTINUED)

b. (continued)

A second method to determine goodwill is to apply the Number

of Years Method. A simpler calculation, this method multiplies
the excess earnings times the number of years it is believed
the excess earnings will continue. Based on information you
supplied me, we assumed the excess earnings will continue for
six more years. Under this method, the value of the goodwill is
$60,000.

A third method to examine is the Times Average Earnings. In

this method, you multiply the average earnings by the number
of years appropriate for sales of other companies in the same
industry. After researching this, I discovered that the Happy
Balloon Corporation (a very similar competitor) recently sold for
five times its annual earnings. Five times Balloon’s annual
income is $350,000, less the $400,000 fair value of the assets,
equals negative goodwill of $50,000.

This negative goodwill represents a bargain purchase since the

fair value of Balloon’s net assets is greater than the $350,000
purchase price. Before acting on this method, I would like to re-
examine the fair value of Balloon’s net assets and consider
whether there might be a reason why Happy Balloon
Corporation only sold for five times annual earnings, rather
than something more.

Based on the calculations we made, the Balloon Bunch

Corporation is worth somewhere between $350,000 and
$460,000. Everything that you pay over $400,000 will be
considered goodwill and will be subject to testing for
impairment on an annual basis, or on an interim basis, if
circumstances dictate. Any amount you pay less than $400,000
will be recognized as a gain in net income in the same period
that the purchase takes place. Any subsequent impairment in
value will be recorded as a loss on the income statement.

Solutions Manual 12.118 Chapter 12

*PROBLEM 12.14 (CONTINUED)

b. (continued)

In addition, the company should request that Balloon provide

audited financial statements for years 2019 - 2023 assuming
that the company has audited financial statements. If this
company does not have audited financial statements, then
perhaps they have had their statements reviewed by a public
accountant. It would be difficult to rely on the financial
information provided by Balloon’s management team if they
have not been audited or reviewed. It appears at first glance
that Balloon’s financial information may be in line with a
competitor and in fact, the earnings are less than the
competitors.

Also, the company should hire auditors to perform due

diligence on both financial and non-financial matters, e.g., state
of the IT system.

Although Balloon did have an appraisal done on the net assets,

you should obtain at least two other appraisals to be able to
assess the quality of the fair value amount.

I hope this information will help you make a wise decision.

Sincerely yours,

My Name, Accountant
LO 11 BT: AP Difficulty: M Time: 30 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

Solutions Manual 12.119 Chapter 12

PROBLEM 12.15

a. Goodwill = Excess of the purchase price of the company over

the fair value of the identifiable assets:

$3,000,000 – $2,750,000 = $250,000

b. No loss on impairment is recorded, because the fair value of

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

c. Computation of impairment:

Implied fair value of goodwill = Fair value of division less the

carrying value of the division (adjusted for fair value changes),
net of goodwill:

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

Carrying value of division.................................
$1,650,000
Increase in fair value of PP&E.........................
150,000
Less: Goodwill.................................................
250,000
(1,550,000)
Implied fair value of goodwill............................ 50,000
Carrying value of goodwill................................ (250,000)
Loss on impairment.......................................... ($ 200,000)

d. Loss on Impairment.........................................
200,000
Accumulated Impairment
Losses-Goodwill............ 200,000

This loss will be reported in income as a separate line item

before the subtotal “income from continuing operations.”
LO 6,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 12.120 Chapter 12

INTEGRATED CASES

IC 12.1 MORROW MEDICAL (MM)

Case Overview

Dr. Morrow is a former surgeon and is currently the president of Morrow Medical
(MM), a private Ontario company that sells various medical and pharmaceutical
products. The company has been quite successful and Dr. Morrow has decided
that he would like to retire. Dr. Morrow has found a potential buyer for the
company that has agreed to buy MM for five times the value of the December
31, 2023 net income. As the auditor there are a number of factors to consider:

- Given that the purchase price is based on 5 times net income,

management (Dr. Morrow) has a bias to inflate 2023 net income to ensure
the greatest return from the sale of MM, whereas the potential buyer has
the opposite incentive.
- The company is experiencing cash flow problems. This may be a signal
that MM is having other problems. This requires further investigation since
it may be a signal of problems with operations or receivables collection.
This could create an additional bias to make the financial results appear
better than they are.
- There may be revenue recognition issues given that MM is shipping
products to hospitals without hospitals issuing a purchase order. This
means that there is no contract for the purchase of the extra inventory and
there may be a higher risk of return of the products or a collectibility issue.
- GAAP is a constraint given that the company interested in buying MM will
want financial statements that abide by GAAP. As auditors, we will need
to ensure GAAP is currently being applied when we provide our audit
opinion. This could be ASPE or IFRS – there is a choice. Unless noted,
the GAAP standards would be similar for the issues discussed in this
case.
- Overall, it is our role as auditors to ensure that the company is fairly
valued, and our client is not overpaying for MM. The net income figure is
our biggest concern, a conservative approach should be taken.

Solutions Manual 12.121 Chapter 12

IC 12.1 MORROW MEDICAL (CONTINUED)

Analysis and recommendations:

Issue: The is a revenue recognition issue related to the delivery of extra surgical
gloves to the hospitals that were not ordered.

Recognize sale of gloves Do not recognize sales

- Given that the gloves have been shipped - Measurement is not estimable since
to hospitals, the risks and rewards have MM is unsure how many surgical
been transferred. This could be used to gloves would be returned by hospitals
argue that revenue should be recognized after the 8-month period.
under ASPE revenue recognition criteria, - Hospitals should only be charged for
the argument under IFRS 15 would be what they ordered. The extra gloves
much weaker. were not part of the original order and
- Given that MM is dealing with hospitals, should not be recorded as revenue.
there is little concern over collectibility. - MM does not have a contract with the
- Given Dr. Morrow’s experience as a hospitals for the extra shipments.
surgeon, he does have experience with Therefore, under IFRS, a contract
turnover related to the gloves. His logic cannot be identified and there is no
that hospitals will run out of gloves is performance obligation (PO) relating to
realistic. Therefore, the sale is a contract. Therefore, under IFRS 15,
measurable. since there is no PO to be satisfied,
- It is likely that the hospitals will keep all revenue should not be recognized.
the extra inventory to avoid the hassle of - It is also unclear if hospitals are even
returning the inventory after 8 months. required to return items that were sent
unsolicited, so MM may be out its
product costs if the hospitals do not
return the gloves and refuse to pay for
them.
- Hospitals are likely to pay for what was
ordered, but the extra inventory was
not. Therefore, collection is doubtful.
- In the first year of the launch of the
surgical gloves, the returns are not
easy to estimate. If a reasonable
estimate could be made then
recognition would be possible.
- Extra gloves that have been shipped
are not the legal responsibility of the
customers and as a result include a
full right to return goods.

Solutions Manual 12.122 Chapter 12

IC 12.1 MORROW MEDICAL (CONTINUED)

Recommendation: Given that hospitals did not order the extra gloves, a sale
should not be recorded for these extra gloves. Dr. Morrow has an incentive to
inflate earnings to his advantage. As a result, removing these sales will reduce
net income, and may result in the reduction of the purchase price. We also need
to determine if the extra inventory that was shipped should be recognized as a
loss in the current year’s financial statements.

If there is evidence of an estimate of sales returns, recognition of a sale may be

possible. However, given our role as auditors for the company purchasing MM,
we need to ensure evidence is reliable.

Issue: Research & development costs have been incurred for the development
of MM Surgical Drill. There is an identified market for this product.

Capitalize the costs Expense the costs

- The product is clearly defined, it is the MM - MM is experiencing cash
Surgical Drill. Costs can be identified (this flow problems. There is
appears to be the only product in the R&D an issue over the
stage). adequacy of resources
- The product is technically feasible, since and the drill may not be
there is a potential buyer that is extremely completed and brought to
interested in this product. Dr. Morrow’s market.
experience as a surgeon and the fact this - Sale of MM is not certain.
project has been in the works since 2020 Therefore, basing
support this. adequacy of resources on
- Management’s intention is to produce and the sale of MM is
market this product. This has been in questionable because it is
planning and development phase since not clear the buyer has
2020. If the company is sold, the potential the intention or ability to
buyer is interested in the MM surgical drill. sell the surgical drill.
It is likely the new owners intend to
complete and market it.
- MM has technical resources available to
complete this project and testing to date
has been successful, which supports future
life and market for product.
- Given there are potential buyers
interested, there is a market for this
product.
- It is management’s intention to bring the
product to market in 2025.
- There is an established market based on
the various market surveys conducted in
hospitals throughout Ontario.

Solutions Manual 12.123 Chapter 12

IC 12.1 MORROW MEDICAL (CONTINUED)

Recommendation: ASPE allows a choice of either treatment; whereas, IFRS

requires capitalization if stringent criteria are met. Given that the drill meets the
criteria for deferral, the costs should be deferred and amortized once the product
is in production and available for sale. Given that the drill represents an asset, it
is not unreasonable to capitalize the costs.

Issue: Which research and development cost items qualify for deferral?

Deferral of costs Expensing of costs

- Testing to evaluate various - The marketing and promotion
product alternatives ($12,000). costs since these costs relate to
- Design of the molds ($17,500). surgical gloves, not to the drill.
- Testing of the surgical drill - The additional $25,000 of tool
($100,000). design costs was already
- Cost of setting up a production expensed in the prior year, and
lab ($30,000) if it is related to prior year expenses can not be
the development of the drill (may reversed.
also be treated as a capital - The assessment of deferral
asset). versus expensing on the 2022
tool design costs was made in
2022 based on the status of the
development of the surgical drill
at that time. This was an
estimate made in 2022. There is
no indication that this
assessment was made in error,
especially since the criteria for
deferral are met in 2023, so
retrospective treatment is not
appropriate.

Recommendation: Dr. Morrow must expense the amounts that do not qualify for
development. Both ASPE and IFRS GAAP is similar in this regard.

Solutions Manual 12.124 Chapter 12

IC 12.1 MORROW MEDICAL (CONTINUED)

Issue: An engineer testing the Surgical Drill was severely injured as a result of a
product malfunction. This malfunction was subsequently fixed; however, the
engineer has filed a lawsuit.

Recognize the estimated loss related to the lawsuit.

- It is measurable since MM’s lawyers have an estimate of the settlement
amount and by implication, the payout is likely (under ASPE) or
probable (under IFRS). If the estimate is reasonable and the future
event (settlement of the lawsuit) is likely or probable, the contingent
loss should be accrued through a charge to income. The additional
contingent liability amount should be disclosed.
- ASPE requires recognition of the low end of the payout range whereby
all amounts in the range are equally probable.
- IFRS requires expensing of the best estimate of the payout (expected
value). This would be higher than the $100,000.

Recommendation: It would make the most sense to recognize the expected

value.

Overall, following IFRS provides the best estimate of the economic income.

Solutions Manual 12.125 Chapter 12

IC 12.2 BIOFUEL INC.

Case Overview
Biofuel Inc. (BI) is a new company with a complicated business model. The
company takes CO2 from its customers and converts it into biofuel. To do this, BI
must build a pipeline and pond on the customer’s land. Once this is done BI
harvests the CO2 from the customer, uses it to produce biofuel and then sells the
biofuel back to its customers.

BI is a privately held company and the bank has asked for audited statements.
Therefore, BI may use IFRS or ASPE (first year). The bank’s focus is on the
impact of the debt-to-equity ratio, it cannot exceed 3:1. ASPE will provide more
flexibility and there is also the cost versus benefit consideration. Any differences
between IFRS and ASPE are identified and noted below.

As the accountant you will want to be transparent regarding the complex

business model, while simultaneously presenting BI’s statements positively given
BI’s ongoing financing needs.

Analysis and recommendation

Issue: Sarah has both created and assessed the value of the prototype for
creating the biofuel. She has exchanged this prototype for company shares.

Fair value Carrying value

- Given that this is a nonmonetary - If BI cannot substantiate the fair
transaction, the exchange value is value of the prototype, BI may
not obvious. need to default to carrying value
- Fair value is estimated at of the assets or more specifically
$500,000; however, evidence is the costs incurred to create the
required to support this value. asset.
- Although this may not be part of - This would include consideration
the normal course of business, regarding which costs to include.
there is evidence to support fair For example, this could be
value since this transaction has viewed as an internally
commercial substance (prototype generated intangible asset
for common shares). (research stage). Therefore,
- There may be an argument that minimal costs would be included.
this is an acquired asset, as - The transaction involves shares;
opposed to an internally however, the fair value of the
generated one. shares is not determinable since
- Treating it this way would this is a new company.
positively affect debt to equity and Therefore, this does not provide
be more transparent since this is any evidence of the fair value of
the most significant asset the the prototype.
company owns.

Solutions Manual 12.126 Chapter 12

IC 12.2 BIOFUEL INC. (CONTINUED)

Recommendation: The value of the prototype is likely unmeasurable, unless

the company can get additional evidence to support Sarah’s estimate. This
would have to be properly disclosed.

Issue: How should the development costs for the prototype be treated once the
costs have been contributed.

Capitalize the costs Expense the costs

- There appears to be future benefit - It is unclear whether the costs are
since there is an established market, development or research costs.
customers are already buying the Also, given that the costs are
algae, funding is available through the transferred, does a market exist?
bank, but the costs are not easily - ASPE allows the choice to
estimated. expense the costs, even if criteria
- Under IFRS all development criteria to capitalize are met.
would need to be satisfied, and if
satisfied Biofuel would be required to
capitalize the costs.

Recommendation: More information may be required; however, it is more

transparent if the costs are recognized on the balance sheet as this is a major
asset.

Issue: Should BI recognize the costs related to the pipeline and pond?

Yes No
- BI’s business model is to get - The assets are located on the
financing from the bank and build customer’s land. Therefore,
these assets, which are controlled access, control, and ownership
by BI in order to generate revenues. are all uncertain.
- BI uses the assets to generate - BI provides construction
revenues through the production services to concrete
and use of the algae. manufacturers and builds
- Costs are recovered through the assets for them.
sale of biofuel, so they have future - BI is paid when the biofuel is
economic benefits to BI. shipped. The biofuel is priced
- This is likely a contract-based such that it includes recovery
intangible whereby BI has the of these costs.
exclusive rights to use the pipeline
and pond to produce biofuel.

Recommendation: – Recognize the costs since the pipelines and ponds are
legally controlled by the company.

Solutions Manual 12.127 Chapter 12

IC 12.2 BIOFUEL INC. (CONTINUED)

Issue: How should the construction costs for the ponds and pipeline be treated?

Capitalize the costs Expense the costs

- This would include any costs - Costs such as interest are really
such as interest, material, and financing costs. Therefore, these
labour required to get the costs are ordinary and ongoing.
assets ready for use.
- ASPE allows choice regarding
how interest is treated.

Recommendation: Capitalization of these costs allows for an appreciation of the

full cost required to provide and support the revenue stream.

Issue: Given that the production of the biofuel requires a facility for the
production process that then converts the cement company CO2 emissions into
the biofuel, it could be argued that BI is providing an end user product as well as
a service. Given this, how / when should revenues for BI be recognized?

Recognize revenues when the biofuel Recognize revenues as construction

is delivered services provided
- Revenues are earned as the biofuel - This may be a bundled sale
is shipped and not before, this comprised of both services and
speaks to legal title and possession provision of the biofuel.
of the biofuel. - BI should add all revenues
- Under IFRS it appears that there is a together and bifurcate.
contract between BI and the cement - Under IFRS, the performance
companies. The shipping of the obligation may consist of two
biofuel satisfies the performance separate performance obligations:
obligation. the construction of the facilities
- Because this contract involves new and the delivery of biofuel.
technology, it is likely that BI controls - It may be difficult to determine
access to the pond and the algae to which portion of the sale price
protect its patent. This prevents the relates to each portion of the
cement companies from preparing contract because of the lack of
their own fuel or selling the algae to competition and comparable
other companies. metrics.

Recommendation: If it is assumed that the pond is controlled by BI, then the

revenues would be recognized when the biofuel is delivered to the customer.

Solutions Manual 12.128 Chapter 12

IC 12.2 BIOFUEL INC. (CONTINUED)

Issue: Should the overhead production costs of the biofuel be treated as

inventory costs or capitalized?

Capitalize the costs Expense the costs

- BI incurs costs to ship from the - It is difficult to determine the fixed
customer pond to its facility, overhead because of the issue of
labour costs for harvesting and who owns the pipeline and pond.
processing, and costs for drying. - It is difficult to determine an
- Fixed overhead would be allocation rate because the
included based on an allocation of process is new.
the cost of the pipeline and pond - Is biofuel a product or a service
if it is controlled by BI. that is provided to the cement
- Algae may be seen as a companies in converting its CO2
biological asset and recognized at into fuel? If it is a service, then the
fair value less costs to sell. Under costs incurred should be
ASPE, biological assets are expensed. It may be a service
measured at cost, including costs since BI does not control or
directly attributable to acquiring, acquire the raw materials, it only
developing, or bettering the controls the processing.
assets. These assets are Consequently, who controls the
amortized, similar to other fuel; can BI determine the price or
Property, Plant and Equipment what happens to excess fuel or to
(PPE), if they have a limited life. whom it gets sold?

Recommendation: If it is assumed that the pond and pipeline are controlled by

BI, then the costs should be expensed as inventory costs, since BI controls the
production process.

Solutions Manual 12.129 Chapter 12

IC 12.2 BIOFUEL INC. (CONTINUED)

Issue: This is a currently a privately held company. Should it elect to report

under ASPE or IFRS?

ASPE IFRS
- IFRS is more costly to implement - If it is management’s intention to
since it generally requires more take the company public in the
disclosure. For a new company, future, it will have to adopt IFRS.
ASPE is more cost efficient and Adopting it early on will improve
easier to implement. consistency.
- ASPE provides more choices in - It may improve comparability with
accounting and this may help the other companies in the same
company to be compliant with the industry, although this is not likely
bank’s debt-to-equity given the technology and
requirement. company are new.

Recommendation: Both choices are acceptable for reporting purposes and

would likely also be acceptable to the bank. As a new company, Biofuel Inc.
would probably want to use ASPE, as it is easier and less costly to implement.

Other Considerations:

- IFRS provides the option to value PP&E at fair value using the revaluation
method.
- BI may incur asset retirement obligation costs since the assets are on
customer land that may have to be restored at end of the asset’s useful
life. IFRS is based on constructive obligation versus a legal obligation.
- Algae may be seen as a biological asset and therefore valued at fair value
less costs to sell.
- Under ASPE, a new standard has been established (and became
effective on January 1, 2021) under Section 3041 regarding accounting
for biological assets and related agricultural inventory. Productive
biological assets under the new standard are held for use to produce or
supply agricultural inventory; they are developed or acquired for use on a
continuing basis with other than short productive lives; and they are not
intended for sale in the normal course of business. These assets are
measured at cost, including costs directly attributable to acquiring,
developing, or bettering the assets. These assets are amortized, similar to
other Property, Plant and Equipment (PPE), if they have a limited life.
They are also assessed for impairment in a manner similar to other PPE.
- Should the CO2 be recognized as inventory when it is piped into the
pond? This is difficult to measure.

Solutions Manual 12.130 Chapter 12

IC 12.3 FINANCIAL ANALYST

To: Supervisor
From: Financial Analyst
Re: Goodwill treatment and impact on ROA

The depressed market values (less than book value) suggest that market
participants are not very optimistic about the prospects for these
companies. Although various factors can impact the market value of a
company, the fact that the market value is considerably lower than the book
value is cause for concern. Also, accounting numbers are based in many
cases on historical costs, which includes allocations, while market prices
will reflect new information about the company prospects. Given this, the
situation does not look very promising.

IFRS requires that goodwill be tested at least annually. The companies

will need to make this assessment. Goodwill is tested for each cash
generating unit. In this case, each division acquired represents a cash
generating unit. Goodwill is tested by comparing the carrying value
including goodwill against the recoverable amount. The recoverable
amount is the higher of value in use and fair value less costs to sell. Since
the carrying value including goodwill is less than the recoverable amount
for each cash generating unit, a loss for goodwill impairment should be
recorded. The table below shows this calculation.

Solutions Manual 12.131 Chapter 12

IC 12.3 FINANCIAL ANALYST (CONTINUED)

A B C D E F G H

Book Value Estimated Fair

Goodwill
including Carrying Value of Net
Value Impairment
Market Goodwill (Net Value of Assets – Costs
Company Value Assets) Goodwill ROA to Sell in Use

ABC Limited – $36,200 $51,500 $30,200 3.5% $36,200 - $32,300 $51,500 -

Division 1 1,000 = 35,200 =
$16,300
$35,200

DEF Limited – 12,700 22,200 9,000 2.6% $12,700 - 16,500 $22,200 -

Division H 500 = 16,500 =
$12,200 $5,700

XYZ Limited – 1,800 4,000 900 5.2% $1,800 -200 3,000 $4,000– 3,000
Division XX = $1,600 = $1,000, but
max = 900

Total $22,900

*Recoverable amount is the higher of: Value in Use and FV less

Costs to Sell
As indicated in the expanded spreadsheet above, unless the market value or
value in use increases dramatically, each of these companies is likely to
recognize a loss on impairment of goodwill. For XYZ Company – Division XX, the
impairment will result in a complete write off of the goodwill asset. Apparently,
the prior acquisitions from which the goodwill was recorded did not materialize
for these companies. The impairment entries are as follows:

Loss on Impairment – ABC Ltd................................. 16,300

Accumulated Impairment Losses-
Goodwill – ABC Ltd.................................. 16,300

Solutions Manual 12.132 Chapter 12

IC 12.3 FINANCIAL ANALYST (CONTINUED)

Loss on Impairment – DEF Ltd............................................ 5,700

Accumulated Impairment Losses-
Goodwill – DEF Ltd.................................. 5,700

Loss on Impairment – XYZ Ltd............................................ 900

Accumulated Impairment Losses-
Goodwill – XYZ Ltd.................................. 900

Impairment losses are reported in the operating income of each company.

Thus, the impairments will reduce the numerator in the return on asset
ratio. Without recognition of the impairments, these companies’ operating
performance is overstated relative to other companies within these
industries. Since these divisions are considered significant in terms of
each company’s overall operations, these write offs will have an impact
for investors.
In addition, these impairments cannot be reversed once recorded.
Therefore, the impairment losses will remain in the retained earnings
balance.

Based on the impact of this impairment loss and the net loss
from operations for each division, the “buy” recommendation should be
reconsidered.

Solutions Manual 12.133 Chapter 12

RESEARCH AND ANALYSIS

RA 12.1 INTERNATIONAL AIRLINES GROUP
a.
International Airlines Group reports goodwill, brand, customer loyalty programs,
landing rights, software, and other as intangible assets on its December 31,
2020 consolidated balance sheet. International Airlines Group prepares its
financial statements in accordance with IFRS as endorsed by the European
Union, which differs in certain respects from IFRS as issued by the IASB. The
detailed amounts (all in millions of € Euros) found in Note 15 were:

Cost Accumulated Net book

amortization amount
Goodwill 593 249 344
Brand 451 0 451
Customer Loyalty 253 0 253
Programmes
Landing rights 1,555 132 1423
Software 1,474 836 638
Other 161 62 99
Total 4,487 1,279 3,208

The accounting policies used by the company are explained in Note 2.

Brands arising on the acquisition of subsidiaries are initially recognized at fair

value at the acquisition date. Brands that are expected to be used indefinitely are
not amortized but are assessed annually for impairment.

Customer loyalty programs arising on the acquisition of subsidiaries are initially

recognized at fair value at the acquisition date. Loyalty programs that have
expected useful lives are amortized while programs that are expected to go on
indefinitely are not amortized but are tested for impairment annually.

Landing rights at specific airports acquired from other airlines are capitalized
at their cost or fair value when acquired through a business combination. Those
landing rights outside of the EU (European Union) are amortized on a straight-
line basis over no more than 20 years. Capitalized landing rights within the EU
are not amortized because regulations within the EU consider the rights to be
perpetual, giving them an indefinite economic life. They are tested annually for
impairment.

Solutions Manual 12.134 Chapter 12

RA 12.1 INTERNATIONAL AIRLINES GROUP (CONTINUED)

International Airlines Group capitalizes the cost of purchased or internally
developed software that is considered separable from its related hardware.
There are no details provided on the nature of this software and how it is used by
the company. These costs are amortized on a straight-line basis over a period
not exceeding five years, with certain specific software developments amortized
over a period of up to ten years.

Emissions allowances (the cost of permits governing allowable emissions

acquired under the European Emissions Trading Scheme) are recognized at
cost and are not amortized. Instead, they are tested for impairment whenever
there is an indication that their carrying amounts may not be recoverable. Note
that this represents a discrepancy with IFRS as issued by the IASB, as
intangibles should be tested for possible impairment at least annually.

Goodwill represents the excess of the cost of business acquisitions over their fair
value and this amount is capitalized but not amortized. Goodwill is allocated to
cash-generating units (CGUs) for impairment testing and this testing is carried
out annually. Any indication that the cost of the goodwill recognized may not be
recoverable results in recognizing an impairment loss.

Note 2 does not comment specifically on testing the landing rights or the
software book amounts for impairment but Note 15 indicates that the EU landing
rights are allocated to cash-generating units and reviewed annually. Also Note 2
states that, in general, all of its intangible assets are tested annually for
impairment.

b. Note 15 indicates the following:

Landing Rights Software

Balance, January 1 1,616 1376
Additions 0 141
Disposals (18)
Reclassifications 43
Exchange movements (61) (68)
Balance, December 31 1,555 1,474

Amortization:
Balance, January 1 115 710
Amortisation charge for the year 6 151
Impairment charge for the year 15 20
Disposals (7)
Exchange movements (4) (38)
Balance December 31 132 836

Solutions Manual 12.135 Chapter 12

RA 12.1 INTERNATIONAL AIRLINES GROUP (CONTINUED)

The group did not acquire any additional landing rights in 2020, most likely
due to the Covid-19 pandemic’s impact on the travel and transportation
industry. In 2019, the group acquired 5 million € worth of landing rights.
Since amortization is only applied to non-EU based rights and the annual
charge in 2020 was 6 million € for the year (based on total landing rights of
1,555 million €), the presumption is that most of the rights relate to EU
airports.

c. International Airlines Group conducts an annual impairment review on all

intangibles with an indefinite economic life. The indefinite-life intangibles are
assigned to a cash generating unit for the purposes of impairment testing.
The CGUs identified are Iberia, British Airways, Vueling, Aer Lingus, IAG
Loyalty, and Other CGUs.

As per Note 15 of the financial statements, the company describes the

following:

“Basis for calculating recoverable amount The recoverable amounts of

Group’s CGUs have been measured based on their value-in-use, which
utilises a weighted average multi-scenario discounted cash flow model. The
details of these scenarios are given in the going concern section of note 2,
with a weighting of 70 per cent to the base case and 30 per cent to the
downside case. Cash flow projections are based on the business plans
approved by the relevant operating companies covering a three-year period.
Cash flows extrapolated beyond the three-year period are projected to
increase based on long-term growth rates. Cash flow projections are
discounted using each CGU’s pre-tax discount rate. Annually the relevant
operating companies prepare and approve three-year business plans, and
the Board approved the Group three-year business plan in the fourth quarter
of the year. The business plan cash flows used in the value-in-use
calculations reflect the Group’s estimated climate related impacts that are
foreseeable and reflect all restructuring of the business where relevant that
has been approved by the Board and which can be executed by
Management under existing agreements.

Key assumptions The value-in-use calculations for each CGU reflected the
increased risks arising from COVID-19, including updated projected cash
flows for the decreased activity from 2021 through to the end of 2023 and an
increase in the pre-tax discount rates to incorporate increased equity market
volatility. For each of the Group’s CGUs the key assumptions used in the
value-in-use calculations are as follows: “

Solutions Manual 12.136 Chapter 12

RA 12.1 INTERNATIONAL AIRLINES GROUP (CONTINUED)

2020
Per cent British Iberia Vueling Aer IAG
Airways Lingus Loyalty
Operating (20) – 16 (12) – 11 (22 – 12) (14) – 13 25 – 27
Margin
ASK as a 45 – 95 49 – 98 46 – 107 400 – 100 n/a
proportion
of 2019
Long-term 2.1 2.0 1.8 1.9 2.0
growth rate
Pre-tax 11.2 11.6 11.5 10.4 10.3
discount
rate

The company did record 12 million € in impairment during 2020 in the Other
CGU’s category only.
The company also recorded 35 million € in impairment during 2020
composed of 15 million € on Landing Rights and 20 million € on software as
shown previously.

d. There are numerous assumptions that go into determining the recoverable

amounts. By giving users the key assumptions that have been used, users
can decide whether they are reasonable. Without this information, the user
would have no understanding of how the values were determined and might
try to guess at the assumptions used. By providing details, more credibility is
given to the final numbers. Also, the sensitivity of the numbers, and which
changes in the assumptions would result in a recoverable amount equal to
the carrying value, are also helpful. It may only take small changes in the
assumptions to reduce the value-in-use.

e. IAG uses Operating Margin and Average Capacity or ASKs, which is

expressed as available seat kilometers. ASK is a standard capacity measure
used in the airline industry. As per Note 15 in the financial statements, there
is a chart that states the assumptions used by management in the
calculation of value-in-use for each CGU. The data visualizations presented
in the annual report help the reader to better understand the goals and
performance of the organization, and how it is measured. This then helps the
user to better understand more complex information and calculations that
might be found later in the notes of the financial statements.

Solutions Manual 12.137 Chapter 12

RA 12.2 SHOPIFY INC.

a. As per Note 1 of the financial statements, Shopify Inc. is a leading global
commerce company that provides tools to start, grow, market, and
manage a retail business. Shopify uses its platform to facilitate commerce
and improve the customer experience for buyers everywhere. Merchants
use the company’s software to run their business across sales channels
including web and physical presences. Its platform also provides
merchants with a single view of their business that facilitates the
management of sales, inventory, order processing, payments, and
fulfillment.

b. As per Note 3 of the financial statements:

“Intangible assets are stated at cost, less accumulated amortization and

impairment. Amortization is calculated using the straight-line method over
the estimated useful lives of the related assets. Purchased software is
amortized over a three year period, acquired technology is amortized over
a two to nine year period, acquired customer relationships are amortized
over a two to five year period, capitalized software development costs are
amortized over a two to three year period, and other intangible assets are
amortized over a three to ten year period. Amortization is recorded into
cost of revenues and operating expenses, depending on the nature of the
asset.

The carrying values of intangible assets are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable. The determination of
whether any impairment exists includes a comparison of estimated
undiscounted future cash flows anticipated to be generated over the
remaining life of the asset or asset group to their net carrying value. If the
estimated undiscounted future cash flows associated with the asset or
asset group are less than the carrying value, an impairment loss will be
recorded based on the estimated fair value.”

Solutions Manual 12.138 Chapter 12

RA 12.2 SHOPIFY INC. (CONTINUED)

Note 11 shows the following breakdown of intangible assets as at December 31,

2020 (in US $000s’s):

Cost Accumulated Net Book

$ Amortization Value
$ $
Acquired technology 161,643 36,953 124,690
Software development 27,520 25,720 1,800
costs
Acquired customer 8,435 2,677 5,758
relationships
Purchased software 6,973 6,773 200
Other intangible assets 4,351 1,123 3,228
Total 208,922 73,246 135,676

c. Given the nature of Shopify’s business model, it needs to invest in

technology, both hardware and software. As seen in part b, Shopify both
purchases/acquires technology and develops it internally. Since these
costs are necessary in order to deliver the company’s products and
services, it is appropriate to allocate the amortization to line items in the
statement of operations, such as cost of sales. As per Note 11 of the
financial statements, the company provides the following breakdown
showing how the amortization of intangibles is allocated:

December 31, December 21, 2019

2020
Cost of revenues $28,885 $17,535
Sales and marketing 2,184 998
Research and 273 266
development
General and 526 73
administrative
Total 31,868 18,872

Solutions Manual 12.139 Chapter 12

RA 12.2 SHOPIFY INC. (CONTINUED)

d. As per Note 3, Software Development Costs:

“Research and development costs are generally expensed as incurred.

These costs primarily consist of personnel and related expenses,
contractor and consultant fees, stock-based compensation, and corporate
overhead allocations, including depreciation. The Company capitalizes
certain development costs incurred in connection with its internal use
software. These capitalized costs are related to the development of its
software platform that is hosted by the Company and accessed by its
merchants on a subscription basis as well as material internal
infrastructure software. Costs incurred in the preliminary stages of
development are expensed as incurred. The Company capitalizes all
direct and incremental costs incurred during the application development
phase, until such time when the software is substantially complete and
ready for its intended use. Capitalization ceases upon completion of all
substantial testing. The Company also capitalizes costs related to specific
upgrades and enhancements when it is probable the expenditures will
result in additional features and functionality. Capitalized costs are
recorded as part of intangible assets in the consolidated balance sheets
and are amortized on a straight-line basis over their estimated useful lives
of two or three years. Maintenance costs are expensed as incurred.”

The relevant sections of IAS 38 that pertain to Shopify’s accounting

policies is as follows:

“An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that
are attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.

Solutions Manual 12.140 Chapter 12

RA 12.2 SHOPIFY INC. (CONTINUED)

An intangible asset arising from development (or from the development

phase of an internal project) shall be recognised if, and only if, an entity
can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so
that it will be available for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future
economic benefits. Among other things, the entity can demonstrate
the existence of a market for the output of the intangible asset or
the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
(e) the availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset.
(f) its ability to measure reliably the expenditure attributable to
the intangible asset during its development.”

Based on the above it appears that Shopify is consistently applying the

applicable standard.

Solutions Manual 12.141 Chapter 12

RA 12.3 INTANGIBLE ISSUES

a. The first step is to determine the purchase price to be allocated. In this
case, the fair value of the consideration given up is the cash of $10 million
plus the $5 million to be paid in one year discounted back one year at a rate
of 6%. The total consideration then is $10 million + $5 million / (1.06), which
totals $14.72 million.

The next step is to identify all the tangible and intangible assets that have
been purchased and determine their fair value at the date of purchase.
Generally, for intangible assets, the fair values are determined using one of
two methods: an income approach which discounts future cash flows the
asset is expected to generate; and the market-based approach that
considers what the acquisition cost would be to acquire a similar asset in the
market. The following is a list of the intangible assets, and how fair values
might be determined:

 Trademark – the value of the trademark is usually determined by

discounting the value of royalties that the company would have paid to
use the trademark. This is known as the “relief from royalty” method. The
controller should research the market to determine what it would have
cost the company in royalty fees for a similar trademark, estimate the
number of years the fees would have been paid, and then discount them
using an appropriate rate. In subsequent years, if it is determined that
this trademark has a limited or finite life, it would be amortized over the
lesser of its legal life or useful life. Although currently there are only six
years remaining, the legal life can be extended indefinitely by paying a
small fee and the company may want to continue to maintain the
trademark rights. The controller, with input from other management, will
need to decide if the trademark’s useful life is limited, or whether it has an
indefinite useful life. If indefinite, no amortization is taken but the carrying
amount is tested annually for impairment by comparing its book value
against its recoverable value. If finite, it will be amortized as indicated
above, and is assessed each year to determine whether there are any
factors that might indicate the trademark is impaired. If so, the carrying
amount of the asset on the books is compared with its recoverable
amount (being the higher of fair value less costs to sell and value in use).
If the recoverable amount is lower, an impairment loss is recognized
equal to the difference between the two amounts. In subsequent years,
the impairment loss may be wholly or partially reversed if the estimates
underlying the input amounts used to determine the recoverable amount
change.

Solutions Manual 12.142 Chapter 12

RA 12.3 INTANGIBLE ISSUES (CONTINUED)

a. (continued)

 Customer relationships – The value of existing customer relationships will

depend on the future cash flows from net profits (sales less cost of sales, less
asset charges and other costs required to generate the sales) and how long
the customer stays with Kolber. These future cash flows are estimated and
then discounted to arrive at a present value. Existing sales contracts are not
required for these relationships to have value. This asset will be amortized
over the period each customer will continue to buy products. The controller
will probably have estimated this time frame already in determining the future
cash flows. Consequently, an amortization expense will be charged annually.
Under IFRS, this account will also be assessed annually to determine
whether there is any indication of possible impairment. The impairment
requirements for this intangible are the same as explained above for a
limited-life trademark.

 Non-compete agreement – The value of the non-compete agreement with

the owners is determined by comparing the estimated difference in the fair
value of the net cash flows that would be realized by the company with and
without the non-compete agreement. One assumption that needs to be
made is how likely it is that the owners would try to compete. Another
assumption that needs to be made is how many of the existing customer
relationships would go back to the previous owners as opposed to remain
loyal to the trademarked safety shoes produced by Kolber. This would affect
the valuation of the customer relationships as an intangible asset. This asset
will be amortized over five years, likely on a straight-line basis, and the
related amortization expense will be charged to the income statement. This
account will be tested annually for impairment as explained above for the
limited-life customer relationships and any limited-life trademarks.

Solutions Manual 12.143 Chapter 12

RA 12.3 INTANGIBLE ISSUES (CONTINUED)

a. (continued)

 Goodwill is the difference between the fair value of the consideration given
up, which is $14.72 million, less the fair values attributed to the identifiable
net assets, which include the tangible assets, liabilities, and the three
identified intangibles above. Goodwill is not amortized but is assessed and
tested annually for impairment. Since goodwill does not generate specific
cash flows independently of other assets making up the business, it must be
assigned to a specific cash-generating unit (CGU) to determine whether an
impairment charge should be recognized. The carrying value of the CGU to
which the goodwill belongs (which in this case would likely be the operations
of this manufacturing plant) is compared to the recoverable amount of the
CGU (equal to the higher of its fair value less costs to sell and its value in
use). If the recoverable amount is less than the carrying amount, then the
goodwill is written down and an impairment loss is recognized to the extent
of the difference. If the difference is greater than the goodwill, then any
remaining amount would be prorated to the other assets of the CGU based
on their relative carrying amounts. No reversals are permitted for impairment
losses associated with goodwill.

b. Under ASPE, the accounting for impairment is similar to the IFRS treatment.
The major difference is that the ASPE testing of goodwill for impairment is
only performed when there are circumstances or events that indicate a
possible impairment. If the fair value of the CGU reporting unit (again in this
case, probably the manufacturing facility) is less than the carrying amount,
then the goodwill is written down by the difference and an impairment loss is
recognized.

Solutions Manual 12.144 Chapter 12

RA 12.4 GOODWILL

a. Goodwill in accounting is “an asset representing the future economic

benefits arising from other assets acquired in a business combination that
are not individually identified and separately recognised” (IFRS 3,
Appendix A). It is measured as the difference between the fair value of
the consideration given up to acquire a business and the fair value of the
acquiree’s identifiable net assets at the acquisition date. It most cases, it
is thought of as the unexplained excess paid for a business over and
above the fair value of its identifiable assets and liabilities.

b. The book and fair values of the goodwill of Echo Corp. differ because
of changes in conditions since the date of acquisition. Given that the book
value of this asset remains constant while economic and other conditions
change, a difference will develop between the two amounts. Only
purchased goodwill, for which there has been an exchange transaction, is
permitted to be recognized in the financial statements. Goodwill that is
internally generated is not capitalized. One reason for this is that it is
difficult to isolate the costs directly attributable to an increased goodwill. In
fact, in some cases, there may be no additional expenditures. A second
reason is that one cannot be certain that the conditions in which goodwill
increases in value will continue to exist in the future and therefore that
future economic benefits will be received by the company that are
attributable to the goodwill. After the date of acquisition, conditions may
have improved and along with them the fair value (but not the book value)
of goodwill. For example, sales volume may have improved because
market demand is stronger due to expansionary economic conditions in
general. The interest of investors also may have increased with the
growth rate in sales by Echo Corp. Inflation may have also had some
effect on the goodwill’s fair
value, but its effect should be eliminated since a general change in the
price level represents only a change in the purchasing power or value of
the monetary unit.

Another reason that goodwill’s fair value and book value may differ
is that the fair value of goodwill is usually a company-specific amount, not
a market-wide assessment of value. The value attributed to goodwill can
also be calculated using different methods, each being an estimate based
on a variety of underlying assumptions.

In conclusion, the carrying amount and fair value are likely to differ as the
former is based on a past transaction and assumptions at that time, while
the latter is based on current estimates of potential for future earnings and
cash flows.

Solutions Manual 12.145 Chapter 12

RA 12.4 GOODWILL (CONTINUED)

c. 1. It is not acceptable practice to record goodwill on the books unless it is

purchased; therefore, it would not be appropriate under GAAP to
increase the stated value of goodwill as it would violate the historical
cost principle. To a professional accountant, such an entry would be
considered unethical and would likely lead to a qualification in the audit
report. Even without an audit, the purchasers, in completing their due
diligence, would likely be aware of the internal change in the goodwill’s
carrying amount and may believe that management is trying to inflate the
value of the company which then works to the company’s disadvantage.
Apart from the ethical issues, goodwill’s carrying amount would have no
effect on the amount paid for goodwill by potential purchasers. The
competitor will set the price based on its estimates of future cash flows
and earnings of the company and on its estimates of the fair value of
current identifiable assets and liabilities, using discount rates appropriate
to its situation. This is unlikely to be the same as Echo Corp.’s estimate
of what the goodwill should be on its balance sheet in any case, and not
what is required to be presented on its historical cost balance sheet.

2. This would also be improper given the information that the goodwill
seems to have increased in value and is not impaired. The value of the
goodwill may have increased (as would be evidenced by the negotiated
purchase price), although such increase in value would not be included
in the financial statements. Goodwill should be eliminated from the
balance sheet and a corresponding loss recognized only if the
circumstances indicate that goodwill has been impaired to the point of
significant uncertainty about its recoverability or that it is, in fact,
worthless.

Solutions Manual 12.146 Chapter 12

CUMULATIVE COVERAGE AND TASK-BASED SIMULATION:

CHAPTERS 10 TO 12

Part A – New Saskatchewan Plant

Required: Determine whether each expenditure related to the new

Saskatchewan plant must be capitalized, expensed or either (policy choice).

Instruction: Place the dollar amount in the appropriate column in the table below.

Capitalize Expense Policy Choice to

capitalize or
expense
Land $500,000
Building 1,500,000
*
Equipment 4,212,360
Furniture 250,000
Training costs $45,000
Avoidable interest $75,000

*
The present value of an annuity of $1,000,000 for five periods at 6% imputed
interest is calculated as follows:

Using Table A.4

PV of annual payment of $1,000,000 X 4.212361........................ $4,212,360
1
(PV factor for ordinary annuity for 5 years at 6%)

Using a financial calculator:

PV $ ? Yields $ 4,212,363.79
I 6%
N 5
PMT $ (1,000,000)
FV $0
Type 0

Solutions Manual 12.147 Chapter 12

CUMULATIVE COVERAGE (CONTINUED)

Part A (Continued)

Excel formula =PV(rate,nper,pmt,fv,type)

Result: $4,212,363.79

Part B – Used Equipment purchased at Auction

Required: Allocate the expenditure related to the used computer bundle to each
component, and identify whether each component must be amortized, expensed
or either (policy choice).

Instruction: Place the dollar amount of the amount allocated to each component
in the appropriate column in the table below.

Capitalize Expense Policy Choice to

capitalize or
expense
Computer $1,6672
Printer 8333
2
($2,000 / $3,000) x $2,500
3
($1,000 / $3,000) x $2,500

Solutions Manual 12.148 Chapter 12

CUMULATIVE COVERAGE (CONTINUED)

Part C – Delivery Truck Disposition

Required: Account for the disposition of the delivery truck.

Instruction: Prepare the journal entry, in good form, in the box below.

Asset Additions and Disposals....................................... 10,000

Accumulated Depreciation — Vehicles.......................... 10,000
Loss on Disposal of Vehicle........................................... 2,500
Depreciation Expense4………………………………….... 2,500
Vehicles................................................................ 25,000

4
Half of the depreciation is recorded on the vehicle disposed of in year of
disposition ($5,000 x 50%).

Solutions Manual 12.149 Chapter 12

CUMULATIVE COVERAGE (CONTINUED)

Part D –Equipment Swap

Required: Determine the impact on the company’s assets, liabilities, and net
income of measuring the transaction with the carrying value versus the fair
value.

Instruction: Write increase, decrease, or no impact in each box.

Carrying Fair
Value Value
Assets No impact Increase
Liabilities No impact No impact
Net income No impact Increase

Carrying Value Journal Entry

Equipment (new)............................................................ 4,000

Accumulated Depreciation—
Equipment—............................................................. 3,000
Equipment— (old)................................................. 7,000

Fair Value Journal Entry

Equipment (new)............................................................ 5,000

Accumulated Depreciation—
Equipment—Ontario................................................. 3,000
Equipment (old).................................................... 7,000
Gain on Disposal of Equipment............................ 1,000

Solutions Manual 12.150 Chapter 12

CUMULATIVE COVERAGE (CONTINUED)

Part E – Vandals’ Attack

Required: Determine the impact on the company’s assets, liabilities, and net
income for the three expenditures related to the vandals’ attack.

Instruction: Write increase, decrease, or no impact in each box.

Security
Paint Glass System
Assets Decrease Decrease No impact
Liabilities No impact No impact No impact

Net income Decrease Decrease No impact

Part F – Research and Development Costs

Required: Determine whether each expenditure is clearly a research cost or if it

can potentially be a development cost (if the six criteria are met at the point
when the costs are incurred).

Instruction: Place the dollar amount of the amount of each expenditure in the
research or development cost box.

Research
and other Potentially
expenses Development
Costs to determine how a video game $50,000
would work with exercise equipment
Design, testing, and construction of $350,000
prototype equipment
Costs to determine the best production 40,000
process for the new equipment
Advertising costs to alert customers about 47,000
the new product

Solutions Manual 12.151 Chapter 12

CUMULATIVE COVERAGE (CONTINUED)

Part G – Intangible Assets and Goodwill

Required: Determine whether the assets listed are impaired, and if so, the
amount of the writedown.

Instruction: Place an X in the Impaired or Not Impaired box for both assets (only
one X per asset). If the asset is impaired, enter the amount of the writedown in
the writedown required box.

Not Impaired Impaired Writedown

(X) (X) Required ($)
Customer list X $66,500
Goodwill X

Recoverable value of goodwill in the amount of $700,000 exceeds carrying

amount of $500,000 and so no entry is required.
Calculation of impairment of customer list:
Amortization Expense5................................................... 25,000
Accumulated Amortization —
Customer List.................................................. 25,000
5
($250,000 ÷ 10 years)
Loss on Impairment....................................................... 66,500
Accumulated Impairment Loss—
Customer List.................................................. 66,500
Cost ............................................................................. $250,000
Less accumulated amortization, Jan. 1, 2023................ 112,500
Less amortization 2023.................................................. 25,000
Carrying amount Dec. 31, 2023..................................... $112,500

Undiscounted cash flows .............................................. 50,000

Therefore, the customer list is impaired.

Impairment excess of carrying amount over fair value:

Carrying amount ........................................................... 112,500
Fair value (given)6.......................................................... 46,000
Loss on impairment........................................................ 66,500
6
The fair value amount is not provided. However, assuming the list has no
market value, its value in use is a reasonable surrogate for fair value. In addition,
$46,000 is the present value of an annuity of $25,000 (n=2, i=between 5% and
6%) – so this is not an unreasonable estimate of fair value.

Solutions Manual 12.152 Chapter 12

Solutions Manual 12.153 Chapter 12

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.

The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior
written permission of John Wiley & Sons Canada, Ltd.

MMXXI xii F1

Solutions Manual 12.154 Chapter 12

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