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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

INTANGIBLE ASSETS - THEORY
Related standard: PAS 38
1. An entity shall choose either the cost model or revaluation model as its accounting policy in
measuring intangible asset. Which statement is correct?
I. The cost model means that an intangible asset shall be carried at cost less any
accumulated amortization and any accumulated impairment loss.
II. The revaluation model means that an intangible asset shall be carried at revalued
amount less any subsequent accumulated amortization and any subsequent
accumulated impairment loss.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Which is not within the definition of an intangible asset?
a. Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
b. Identifiable nonmonetary asset without physical substance.
c. A resource controlled by an enterprise as a result of past events.
d. A resource from which future economic benefits are expected to flow to the enterprise.
3. Which is incorrect concerning the recognition and measurement of an intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price,
including import duties and taxes and any directly attributable expenditure of preparing
the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the
cost is based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the cost
is equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is
equal to the total payments over the credit period.
4. The appropriate method of amortizing intangible asset is best described by which of the
following?
a. The straight line method, unless the pattern in which the assets economic benefits are
consumed by the enterprise can be determined reliably.
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic amortization without regard to
any particular method
d. The straight line method in all circumstances
5. The best definition of useful life of an intangible asset is
a. The legal life of the intangible.
b. The period over which management believes the intangible asset will contribute to the
revenue-producing process.
c. Twenty years.
d. The period over which the cost of the asset can be deducted for income tax purposes.
6. Which of the following factors should not be considered in estimating the useful life of
intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset
7. It is the systematic allocation of the cost of an intangible asset less any residual value as
an expense over the assets useful life?
a. Depreciation
c. Depletion
b. Realization
d. Amortization

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8. The residual value of an intangible asset should be presumed zero, unless

I. There is a commitment by a third party to purchase the asset at the end of its useful life.
II. There is an active market for the asset and residual value can be determined by
reference to that market and it is probable that such market will exist at the end of the
assets useful life.
a. Both I and II
b. Neither I nor II
c. II only
d. I only
9. Which one of the following is not a component of the cost of internally generated intangible
asset?
a. Cost of materials and services used or consumed in generating the intangible asset.
b. Cost of employee benefits arising from the generation of the intangible asset.
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset.
10. Which statement is incorrect concerning internally generated intangible asset?
a. To assess whether an internally generated intangible asset meets the criteria for
recognition, an enterprise classifies the generation of the asset into a research phase
and a development phase.
b. The cost of an internally generated asset comprises all directly attributable costs
necessary to create, produce and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.
11. The following expenditures should be expensed when incurred, except
a. Advance payment for delivery of goods or rendering of services
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs
12. A lessee incurred costs to construct office space in a leased warehouse. The estimated
useful life of the office is 10 years. The remaining term of the nonrenewable lease is 15
years. The cost should be
a. Capitalized as leasehold improvement and depreciated over 15 years.
b. Capitalized as leasehold improvement and depreciated over 10 years.
c. Capitalized as leasehold improvement and expensed in the year in which the lease
expires
d. Expensed as incurred
13. Research is
I. Original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
II. Application of research finding or other knowledge to a plan or design for the production
of new or substantially improved material, device, product, process, system or service,
prior to the commencement of commercial production or use.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
14. If a company constructs a laboratory building to be used as a research and development
facility, the cost of the laboratory 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 cost
c. Depreciation or immediate writeoff depending on company policy
d. An expense at such time as productive research has been obtained from the facility
15. A research and development activity for which the cost should be expensed as incurred is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototypes and models
c. Trouble shooting in connection with breakdowns during commercial production
d. Periodic design changes to existing products

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16. On January 1, 2005, Haze Company had capitalized costs for a new computer software
product with an economic life of five years. Sales for 2005 were 30 percent of expected
total sales of the software and the pattern of future sales can be measured reliably. At
December 31, 2005, the software had a net realizable value equal to 90 percent of the
capitalized cost. What percentage of the original capitalized cost should be reported as the
net amount on the December 31, 2005 balance sheet?
a. 70%
b. 72%
c. 80%
d. 90%
17. The proper accounting for the costs incurred in creating computer software products 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 only if the computer software has
alternative future use.
d. Capitalize all costs as incurred until a detailed program design or working model is
created.
18. Which statement is correct regarding the proper accounting treatment for internal-use
software costs?
I. Preliminary costs should be capitalized as incurred.
II. Application and development costs should be capitalized as incurred.
a. I only
b. II only
c. Both I and II
d. Neither I and II
19. Which of the following statements is incorrect regarding internal use software?
a. The application and development costs of internal-use software should be amortized on
the straight line basis unless another systematic and rational basis is more appropriate.
b. Internal-use software is considered to be software that is marketed as a separate
product or as part of a product or process.
c. The costs of testing and installing computer hardware should be capitalized as incurred.
d. The costs of training and application maintenance should expensed as incurred.
20. Which following statements is correct regarding the treatment of start-up activities related
to the opening of the new facility?
I. Cost of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting them ready for their
intended use should be expensed as incurred.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
21. Operating losses incurred during the start up years of a new business should be
a. Accounted for and reported like the operating losses of any other business
b. Written off directly against retained earnings
c. Capitalized as a deferred charge and amortized over 5 years.
d. Capitalized as an intangible asset and amortized over 5 years.
22. Which of the following is not a method of computing goodwill?
a. Capitalize excess earnings.
b. Discount the excess earnings for a limited number of years.
c. Capitalize total average earnings and subtract the fair value of net assets.
d. All of these are methods of computing goodwill.
23. Identifiable intangible assets include all of the following, except
a. Computer software
c. Franchise
b. Trademark
d. Goodwill
24. In accordance with the new international accounting standard, which statement is correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for impairment at least
annually.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
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