CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

PAS 38 - INTANGIBLE ASSETS

1. Which of the following is a criterion that must be met for an item to be recognized as an intangible
asset other than goodwill?
a. The fair value can be measured reliably.
b. The item is part of an activity aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services.
d. The item is nonmonetary, identifiable and lacks physical substance

2. Which of the following items would qualify as an intangible asset?

a. Advertising and promotion on the launch of huge product
b. College tuition fees paid to employees who decide to enroll in an executive MBA program at
Harvard University while working with the entity.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.

3. Which disclosure is not required with respect to intangible assets?

a. Useful life of the intangible asset
b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitment for the acquisition of intangible asset
d. Fair value of similar intangible asset used by competitors

4. What valuation methods are used for intangible assets?

a. Cost model and fair value model
b. Revaluation model and fair value model
c. Cost model and fair value through profit or loss model
d. Cost model and revaluation model

5. An entity that acquired an intangible asset may use the revaluation model for subsequent
measurement only when
a. The useful life of the intangible asset can be reliably determined.
b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset.

6. The cost of an internally generated asset includes all of the following, except
a. Cost of materials and services used in generating the intangible asset.
b. Compensation costs of personnel directly engaged in generating the asset.
c. Fees to register a legal right.
d. Expenditure on training staff to operate the asset.

7. Under current accounting practice, intangible assets are classified as

a. Amortizable or unamortizable.
b. Limited life or indefinite life.
c. Specifically identifiable or goodwill type.
d. Legally restricted or goodwill type.
8. An intangible asset is regarded as having an indefinite useful life when
a. There is no forseeable limit to the period over which the asset is expected to generate net cash
inflows to the entity.
b. There is a forseeable limit to the period over which the asset is expected to generate net cash
inflows to the entity.
c. The useful life of the intangible asset arises from contractual right.
d. The useful life of the intangible asset arises from legal right.

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9. Entities should evaluate indefinite life intangible assets at least annually for
a. Recoverability
b. Amortization
c. Impairment
d. Estimated useful life
10. What is the appropriate method of amortizing intangible asset?
a. The straight line method, unless the pattern in which the asset’s economic benefits are consumed
by the entity can be determined reliably.
b. The double declining balance in all circumstances
c. A subjective amount of periodic amortization without regard to any particular method
d. The straight line method in all circumstances
11. Which statement describes the appropriate accounting for intangible asset with finite useful life?
a. The cost of the asset is not amortized but is periodically tested for impairment
b. The cost of the asset is amortized over the useful life and the asset is never tested for impairment
c. The cost of the asset is amortized over 40 years a reasonable period
d. The cost of the asset is amortized over the useful life and the asset is periodically tested for
impairment when there is an indication of impairment
12. Intangible assets with indefinite life are tested for impairment
a. Quarterly at the quarterly reporting date
b. Annually at the annual reporting date
c. Biannually at the reporting date
d. There are no guidelines defining when intangible assets are tested for impairment
13. The major problem of accounting for intangible asset is determining
a. Fair value
b. Separability
c. Residual value
d. Useful life
14. Factors in determining the useful life of an intangible asset include all, except
a. The expected use of the asset.
b. Any legal or contractual provision that may limit the useful life.
c. Any provision for renewal or extension of the legal life.
d. The amortization method used.
15. Goodwill may be recorded when
a. It is identified within an entity
b. One entity acquires another in a business combination
c. The fair value of assets exceeds cost
d. An entity has exceptional customer relations.
16. Which statement accurately describes the appropriate accounting for goodwill?
a. It should be recorded at cost and amortized over 40-year period
b. It should be recorded at cost and amortized over a 10-year period
c. It should be recorded at cost and tested for impairment every three years
d. It should be recorded at cost and not amortized but tested for impairment on an annual basis and
more often if certain events occur
17. Goodwill should be tested for impairment at which of the following levels?
a. Each reporting unit
b. Each acquisition unit
c. Each identifiable long-term asset
d. Entire business as a whole
18. An entity has determined that fair value of cash generating unit exceeds the carrying amount. Which
statement is true concerning the impairment of the CGU?
a. Impairment is not indicated and no additional analysis is necessary.
b. Goodwill should be written down as impaired.
c. The assets and liabilities should be valued to determine if there has been impairment of goodwill
d. Goodwill should be tested at the entity level.
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19. When a patent is amortized, the credit is usually made to

a. The patent account
b. An accumulated amortization account
c. An accumulated depreciation account
d. An expense account

20. A patent should be amortized over

a. Twenty years
b. The useful life
c. The useful life or twenty years, whichever is longer
d. The useful life or twenty years, whichever is shorter

21. When an entity successfully defended a patent from infringement by a competitor, the cost of
litigation should be charged to
a. Patent and amortized over the legal life of the patent.
b. Legal fees and amortized over five years or less.
c. Expense of the period.
d. Patent and amortized over the remaining useful life of the patent.

22. The cost of purchasing rights for a product that might otherwise have seriously competed with one
of the purchaser’s patented products should be
a. Charged off in the current period.
b. Amortized over the legal life of the purchased patent.
c. Added to factory overhead and allocated to production of the purchaser’s product.
d. Amortized over the remaining useful life of the patent for the product whose market would have
been impaired by competition from the newly patented product.

23. Copyright should be amortized over

a. The legal life
b. The life of the creator plus fifty years
c. Twenty years
d. The useful life or legal life, whichever is shorter.

24. Which of the following should be expensed as incurred by the franchisee?

a. Amount paid to the franchisor for the franchise
b. Payment to an entity other than the franchisor for that entity’s franchise
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise
d. Periodic payments to the franchisor based on the franchisee’s revenue

25. Which statement is true about development cost?

a. Development cost must be expensed.
b. Development cost is always deferred and expensed against future revenue.
c. Development cost may be capitalized as an intangible asset in very restrictive situations.
d. Development cost is recorded as component of other comprehensive income.

26. Which statement is true when an entity has recently completed a research and development project?
a. Costs incurred during the research phase can be capitalized
b. Costs incurred during the development phase can be capitalized if criteria such as technical
feasibility of the projects are met.
c. Training costs of technicians used in research can be capitalized
d. Designing of jigs and tools qualify as research activities.

27. Which best describes the current method of accounting for R and D?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

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28. How should research and development costs be accounted for?

a. Capitalized when incurred and then amortized over the estimated useful life.
b. Expensed in the period incurred.
c. Either capitalized or expensed depending upon materiality.
d. Expensed in the period incurred unless it can be clearly demonstrated that the expenditure will
have alternative future use or unless contractually reimbursable.
29. Which research and development costs should be capitalized and amortized?
a. Labor and material costs incurred in building a prototype model.
b. Cost of testing equipment that will also be used in another separate research and development
project scheduled to begin next year
c. Administrative salaries allocated to research and development
d. Research findings purchased from another entity.
30. If an entity constructs a laboratory building to be used as a research and development facility, the
cost of the building is matched against earnings as
a. Research and development expense in the period of construction.
b. Depreciation deducted as part of research and development expense.
c. Depreciation or immediate writeoff depending on accounting policy.
d. An expense at such time as productive development has been obtained from the facility.
31. A research and development activity for which the cost should be expensed is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototype and model
c. Trouble shooting in connection with breakdown during commercial production
d. Periodic design changes to existing product
32. Which of the following costs should not be capitalized?
a. Cost of equipment to be used on current and future research project
b. Engineering cost incurred to advance the product to full production stage
c. Cost incurred to file a patent
d. Cost of testing prototype before economic feasibility has been demonstrated
33. The accounting for costs incurred in creating computer software is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until technological feasibility has been
established for the product.
c. Charge research and development expense if the computer software has alternative future use.
d. Capitalize all costs as incurred until a detailed program design or model is created.
34. Start-up costs including legal and state fees incurred to organize a new entity should be
a. Capitalized and never amortized.
b. Capitalized and amortized over 40 years.
c. Capitalized and amortized over 5 years.
d. Expensed as incurred.
35. Operating losses incurred during the start-up years of a new business should be
a. Accounted for and reported like operating losses of any other business.
b. Written off directly against retained earnings.
c. Capitalized as a deferred charge and amortized over five years.
d. Capitalized as an intangible asset and amortized over twenty years.
36. Intangible assets are reported in the statement of financial position
a. With an accumulated amortization account
b. Under property, plant and equipment
c. As a separate line item
d. All of these are allowed in presenting intangible assets

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