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Chapter 8 Practice Quiz

Question 1: Intangible assets: A: B: an C: D: E: May not be revalued and must be amortised over their useful lives. Are only able to be revalued if they have been internally generated and there is active market for them. May only be revalued to their fair value as assessed by a licensed valuer. may be measured by using either the cost model or the revaluation model. None of the above.

Question 2: What is the test for deferral of research costs as required by AASB 138? A: Research costs can be deferred (recorded as an asset) when it is probable that the project they are applied to will bring future economic benefits. B: Research costs may not be deferred unless it is almost certain that the project they are applied to will bring future economic benefits. C: Research costs may not be recorded as an intangible asset. D: Research costs may be deferred if the entity can demonstrate that an intangible asset exists and that it will generate future economic benefits. E: Research costs may be recorded as an intangible asset if the company intends to develop the product further. Question 3: The requirement in relation to the amortisation of development cost is that: A: It is to be amortised straight-line over a period not greater than 20 years. B: It is to be amortised from the time of deferral so as to match the cost to the related benefits. C: It is to be amortised using an accelerated depreciation rate over a period not exceeding 10 years. D: It is to be amortised from the time the asset is available for use and shall reflect the consumption of the economic benefits by the entity. E: None of the above. Question 4: Glass 4 Windows is involved in a research and development project to create a filtering window that removes the need for curtains. For the current year ended 30 June 2004 expenditure on the project is as follows: Research Development costs $235 000 $350 000

The window is expected to earn revenues of $70 000 per year for the 10 years commencing 1 July 2004. Assuming straight-line amortisation, how much of the research and development cost should be expensed this period and what amount should be amortised in the year ended 30 June 2007? A: B: C: D: E: Expensed in Expensed in Expensed in Expensed in None of the 2004: $58 500 Amortisation in 2007: $58 500 2004: $235 000 Amortisation in 2007: $35 000 2004: $235 000 Amortisation in 2007: $28 000 2004: $350 000 Amortisation in 2007: $23 500 above.

Question 5: Examples of elements of a business that commonly make up goodwill are: A: B: C: D: E: Patents and licences. Trademarks and brand names. Research and development. Established reputation and loyal customers. All of the above.

Question 6: The treatment of internally generated goodwill varies from purchased goodwill in that: A: Purchased goodwill is not amortised whereas internally generated goodwill is assumed to be maintained indefinitely. B: Purchased goodwill may be recorded as an asset, whereas internally generated goodwill may not. C: Internally generated goodwill is to be amortised over a period of no greater than 20 years, whereas purchased goodwill may not be recorded. D: Purchased goodwill is to be expensed in the period it is bought whereas internally generated goodwill is to be deferred and amortised over a period of no less than 20 years. E: None of the above. Question 7: Purchased goodwill is recognised as the amount of: A: The excess of the cost of acquisition of another entity by an acquiring entity over the fair value of the identifiable net assets acquired. B: The difference between the cost of acquisition of a subsidiary and the realisable value of net assets of the subsidiary. C: The lower of the sum of related expenditures on advertising and promotion undertaken in the last 2 years by the subsidiary being purchased and the independent valuation of the market value of that subsidiarys goodwill. D: The excess of the cost of acquisition of another entity by an acquiring entity over the recoverable value of the identifiable net assets acquired. E: The excess of the cost of acquisition of another entity by an acquiring entity over the fair value of the identifiable net assets and contingent liabilities acquired. Question 8: Far-flung Co Ltd purchases Local Co Ltd for the purchase consideration of: Cash Shares in Far-flung Co Ltd Land $100 000 50 000 shares with a market value of $1.60 Carrying value of $90 000 Fair value of $100 000

Far-flung incurred legal fees of $6 000 to complete the acquisition. Local Co Ltd had the following assets and liabilities at the time of the purchase: Carrying amount Assets: Land Machinery Cash Liabilities: Loan 100 000 50 000 20 000 105 000 Recoverable amount 150 000 80 000 Fair value 200 000 85 000

What is the value of goodwill, if any? A: B: C: D: E: $0 $80 000 $141 000 $86 000 None of the above.

Question 9: Big Ltd has purchased 100 per cent of Little Ltd for a cash payment of $800 000. The additional costs to Big Ltd to complete the purchase were $3000. An extract from the balance sheet for Little Ltd at the date of acquisition shows: $ Assets Current assets Cash Net accounts receivable Inventory Total current assets Non-current assets Land and buildings (net) Vehicles (net) Equipment (net) Total non-current assets Total assets Liabilities Accounts payable Loan Total liabilities Net assets 8 000 100 000 108 000 456 000 12 000 25 000 80 000 $

117 000

200 000 90 000 157 000

447 000 564 000

Additional information: The assets and liabilities of Little Ltd are stated at fair value except that: land and buildings have a fair value of $300 000 accounts receivable have a fair value of $20 000 Little owns a licence that has not been recorded in the accounts. Its fair value is $150 000. What is the amount of purchased goodwill, if any, that has been acquired by Big Ltd? A: B: C: D: E: $242 $344 $252 $102 None 000 000 000 000 of the above.

Question 10: Which of the following statement(s) in regard to goodwill is/are correct in accordance with AASB 136 Impairment of Assets? A: An impairment loss must be recognised when the carrying amount of a cashgenerating unit exceeds it recoverable amount. B: An impairment loss recognised may not be reversed in a subsequent period. C: Value in use is the present value of future cash flows expected to be derived from a cash-generating unit. D: All of the above. E: A and B.