Question

1) Which of the following is an intangible asset that is not typically amortized?

A) Patent

B) franchise

C) Copyright

D) Goodwill

2) The first step in testing for impairment of goodwill is to?

A) Compare the fair value of the reporting unit with its book value, including goodwill.

B) Asses qualitative factors that indicate whether the fair value of the reporting unit is greater or less than its carrying value

C) Compare the fair value of the reporting unit with its book value, excluding goodwill.

D) Measure the fair value of the reporting unit and the fair value of the identifiable assets of the reporting unit.

Answer 1

Answer:

1) Option D

2) Option B

Explanation:

1)

Intangible assets: An intangible assets are the assets that have no physical existence and has a useful life greater than one year, for example, Patent, franchise, trademark, and copyright etc.

Amortization: If an intangible asset has a definite useful life then it is amortized over its useful life. The most preferable method of amortization is the straight line method i.e. full cost is amortized over its useful life.

As per GAAP, goodwill is never amortized, however, it is evaluated every year by management and impaired the goodwill if required.

2)

Impairment: The assets are considered for impairment if the fair market value of the assets is less than its book value reported in the books of accounts. The example of assets that are generally impaired is goodwill, account receivable and long-term assets.

The first step in testing for impairment of goodwill is asses qualitative factor under this step, the situation is reviewed and it is decided that is it necessary to conduct further testing.

Under this step, company analyze that whether the fair market value of assets is less than book value or not, if fair market value of reporting unit is less than its carrying value then the goodwill should be impaired and loss reported in the income statement.