3310-Ch 9-End of Chapter solutions-ST

Chapter 9
Intangible Assets, Goodwill,

Mineral Resources, and Government Grants
N. Problems
P9-1. Suggested solution:
Intangible asset
Item (Yes / No)
a. Cash N
b. Costs of research and development Y
c. Computer software applications Y
d. A currency derivative N
e. Purchased goodwill N*
f. Internally developed goodwill N*
g. Trademark Y
* Goodwill is not a separately identifiable,
Has Not
physical separately
Item substance Monetary identifiable
a. Account receivable 
b. Investment in shares 
c. Cost of upgrading a computer system 
d. Purchased goodwill 
e. Development cost at a mineral site 
a. This is an intangible asset as it confers on the firm a contractual right. Further, the right is
identifiable, transferrable, and easily measured.
b. Paying these legal fees establishes that there is a legally enforceable, separable, and
transferrable right; the company has exclusive right to the use and sale of the drug.
Further, the future earnings are substantially more than the amount paid.
c. Expense as the company lost the exclusive privilege. As the right is not exclusive, others
can copy the drug without permission, so the right is not transferrable or enforceable.
d. While there is clear evidence of payment to an outside party, and as such it is externally
acquired, the “asset” is neither separable from the company for sale, nor does the
company have a legal right to any benefits. The “asset” is the better educated employees
Copyright © 2017 Pearson Canada Inc.

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ISM for Lo/Fisher, Intermediate Accounting, Vol. 1, Third Canadian Edition
which are not separable or legally owned by the firm. The firm cannot sell its employees
as slavery is outlawed.
e. The taxis should be set up as PPE. The licence’s value is easily determined, at $1,000,000
($2,500,000 – $1,500,000). This licence permits the operation of taxis in Winnipeg. This
right is identifiable, transferrable, separable, enforceable, and objectively valued. As
such, it is a legitimate intangible asset.
a. Short- or long-term accounts receivable are treated as assets as they represent legally
enforceable cash inflows. These monetary cash inflows are clearly identifiable and
measurable future benefits and therefore assets.
b. Prepaid expenses, such as the payments in advance or early for property taxes or
insurance, are assets, as the future benefit is clearly identifiable and measurable and the
allocation of the asset to expense is easily established. The passage of time causes the
future benefit to expire.
c. Deferred development costs are considered eligible for treatment as an asset if they
satisfy all six of the criteria for deferral. These strict criteria (feasibility, intention, ability,
market/usefulness, adequate resources, reliable measurement) must all be satisfied to
qualify as an asset. Such rigour in analysis to qualify as an asset ensures that companies
capitalize only development costs that have identifiable future benefits.
d. Only the legal costs to successfully defend an internally developed patent or copyright
are considered to be an asset. By successfully proving that the patent or copyright is valid
and exclusively belongs to the firm, the firm proves that there is an identifiable, legally
enforceable future right and benefit which the company has. Purchasing
patents/copyrights and other privileges from others readily establishes the value and
uniquely identifiable nature of these intangible assets.
e. A franchise is an intangible asset as it confers on the buyer the legal right to use and be
associated with certain exclusive brands or processes that have future revenue potential.
The value and identifiable nature of this asset are easily established.
f. Goodwill is not an intangible asset; rather, it is a residual amount that is derived by
subtracting the fair value of the acquired assets and liabilities from the price paid of the
business. Goodwill calculated this way is an attempt to value the economic goodwill or
surplus earnings value/potential of the firm resulting from the successful deployment of
its assets to generate income. As the value of the various identifiable assets and liabilities
is possible, this residual goodwill amount is a surrogate for the implied economic
goodwill in the acquisition of another company.
a. Based on the historical cost principle, the company did not incur a cost of $500,000 for
the mailing list so its value must remain at its historical or original cost of $0.
b. As the charity paid $500,000 for the list, the value can readily be established. The item is
identifiable and implies a legal right to use. The charity must have completed a financial
analysis of the cost and benefits of buying the list. The list will be usable for four years.
These conditions suggest the list is an asset for the charity.

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Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and Government Grants
c. The signing bonus is identifiable, legally enforceable, contractual, and confers a benefit
on the team for a three-year period. The player is expected to generate ticket sales for the
team; there is a future benefit related to the contract and athlete. Further, the player can
be sold or traded by the team. Overall, the $9,000,000 signing bonus qualifies as an
intangible asset.
d. The in-process technology is an intangible asset. It was valued and purchased as part of
an arm’s-length transaction. The technological processes were identified and duly
considered to have value when the company was purchased.
a. As the advertising campaign has not been launched this $15,000,000 is really a deposit or
retainer. As such it is an intangible current asset, correctly classified as a prepaid
expense. In the fiscal period when the branding strategy is started, the full cost should be
expensed.
b. This payment arises from a legal or contractual obligation. Paying the fine permits the
company to continue to operate in the future, which is why the fine was paid. The
company paid the fine as the economic benefits of paying it exceed the amount paid.
However, the cause of the payment was a past transgression, and therefore it should be
expensed.
c. The better trained player can be identified, is separable from the team, and can be sold as
he is under a transferrable contract with the team. Financial analysis shows that this
training will increase revenues for the team, which exceeds the $500,000 cost of the
special training. Also, the player can be sold or traded, and the skills developed will go
with the player. These costs of training the player can be treated as an asset.
d. Because this training will not result in incremental revenue or income, the amount should
be expensed as a normal operating cost of the hockey team.
a. Arguments in support of expensing:

First Argument: If one were to capitalize this expenditure, you would essentially be
capitalizing human beings as assets of the company. The company does not control the
use of future benefit as these are the employees who can easily leave and find
employment elsewhere.
Second Argument: Can the future benefit of $15,000,000 be reasonably and accurately
quantified as being equal to or more than $15,000,000? It is hard, if not impossible, to
measure the future economic benefit of this training program, so it should be expensed.
Third Argument: Training staff is an ongoing, recurring operating expense and, as such,
should be expensed as incurred.
Fourth Argument: As Public Co. Ltd. is a large public company, its investors are likely
sophisticated and knowledgeable in interpreting financial statements; those who would
like the expenditure capitalized will adjust the statements accordingly. [Note: this
argument can also be used in part (b).]

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b. Arguments in support of capitalizing:

First Argument: The reason why the company spent the $15,000,000 was to allow the
successful installation of the new technology. The benefit of the training will be realized
once the equipment is in use, which is in later fiscal periods. Expensing this amount in
the current period results in poor matching of expenses with revenues.
Second Argument: Whereas the company does not own or control its employees from
leaving the firm, it reasonably can be suggested that most of the trained employees will
continue employment with the company and so the “asset” will remain with the company.
The inability to control the use of the benefit for extended periods can be handled by
adjusting the amortization period to fewer than 15 years.
Third Argument: The economic and financial decision-making process that supported this
investment incorporated a multi-period perspective. Given the amount of this investment
the company likely completed capital budgeting/net present value analysis techniques
which discounted the benefits in later years to their present value equivalents to justify
this expenditure. It seems appropriate that the accounting should be founded on a similar
logic.
c. The 15-year amortization period seems excessively long. To offset the fact that the
company does not own or control the use of their employees, a short period of
amortization would be recommended. Five years would seem a reasonable compromise
as this affords some opportunity to spread the amount over several periods instead of
reporting a one-time hit to earnings.
a. Answer: $70 million (Stadium for $45 million and land for $25 million). 40% of the price
is for tangible assets (70 / 175 = 40%).
b. Player contracts: The athletes have signed contracts to play for several years in the
future. These legal commitments allow the team to sell these players to other teams. This
is the estimated re-sale value of these contracts.
Leases on luxury spectator boxes: This is the present value of these lease contracts, plus
renewal of these leases.
Product licensing agreements: Present value of existing licensing agreements plus
renewal of these arrangements.
Season ticket subscriber list: Present value of the potential renewal of ticket sales to
likely customers.
Contracts and commitments for use of stadium: As the buyer owns the stadium there are
other uses for it during the off-season and vacant days during the season. This is the
imputed present value of these contracts.
The “team”: The value of the franchise (privilege) to be a part of this professional sports
league.
c. Easily measurable and identifiable: Cable television broadcast contract, leases on luxury
spectator boxes, product licensing agreements, contracts and commitments for use of
stadium. The common feature is there is a contract or legal agreement to substantiate
their existence and these contracts have specified methods to determine their cash flows
and related value.

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Reasonably measurable and identifiable: Player contracts, season ticket subscriber list.
The common feature of these items is that they are identifiable but there is no clearly
stated method for determining their cash flows or market value. Further, they have niche
markets that are unique and volatile.
Very difficult to measure and identify: The “team.” It is not clear what this is. There is no
evidence this is economic goodwill given the team’s net losses over the past few years.
This value must be based on non-financial considerations. The value may be
psychological, being the fame and prestige that comes with ownership. Given the wealth
of the buyer, this transaction may not have the traditional objective of earning income.
d. I would capitalize all these amounts with the exception of the “team.” Given that the team
has no apparent economic goodwill it would not qualify as “accounting goodwill.” This
item is especially subjective and hard to quantify. I would conservatively and cautiously
expense it.
a. IFRS makes a distinction between research and development costs as they are in fact
different in nature. Common usage incorrectly groups these expenditures together for
convenience and glamour, but the objective and focus of these two activities are very
different. Separating research from development activities and defining the two terms
allows for subsequent differences in how amounts spent on these activities can be
accounted for.
b. First, research focuses on new knowledge and understanding, whereas development
focuses on commercializing this knowledge into defined applications and processes.
Second, whereas both research and development activities (as undertaken by for-profit
enterprises) implicitly expect an eventual financial reward, the connection is not
definable or identifiable for research costs. For development costs, including those not
capitalized, the association between the cost and the application is clear and definable.
Third, research activities precede development activities.
The distinctions encourage clarity and precision of thought and analysis, and set up the
case for the potential capitalization of some development costs. This deliberate rigour
empowers professional judgment, as it provides guidelines and principles that the
accounting professional can apply to a given circumstance and thereby avoids a rule-
based methodology for resolving complex accounting issues.

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Technical feasibility: Development implies that there is an identified application; it does not
guarantee that the application works. For an item to be classified as an asset it must embody the
notion of a future benefit. If the enterprise cannot prove it works, then how can it be an asset?
Projects that do not work cannot be assets, as there is no future for such an undertaking.
Management intention to use or sell: Even if something works, this does not mean the company
will commercialize it. Many investments with positive net present value are not implemented,
due to capital rationing constraints and strategic considerations. For an asset to be recognized
there must be a clear intent to undertake the venture. If there is no intent to complete a project,
then the realization of a future benefit is jeopardized.
Ability to use or sell: Intention does not guarantee success; one must also be able to complete the
project or application. Without ability to use or sell, there is no hope of eventual realization of
the future benefit.
Demonstrate there is an external market or internal use: In a for-profit context, the present value
of future cash inflows must exceed the present value of cash outflows to qualify as a viable
investment. Management must be able to demonstrate by way of credible financial data and
analysis that the undertaking will generate a profit in the future. Without credible financial data
and analysis, there is no evidence to support the assertion by management that there is an asset.
Adequate resources to complete: Projects require financing and other resources to complete.
There needs to be a commitment of resources to finish the project. Without such a commitment,
the project will not come to fruition and there will be no completed project or process.
Reliable measurement of expenditures: Management must be able to show that the expenditure is
related to the undertaking. Further, the amount of the expenditure must be quantifiable. Overhead
and general expenditures allocated to a project may be arbitrary and suspicious; the connection
must be reasonable and direct. Without this constraint, management could assign all expenditures
to those projects that meet the first five criteria and abuse the spirit and first principle of
classifying an expenditure as an asset.
In summary, the onus is on management to prove the expenditure is an asset. Without such
evidence, the amount involved must be expensed. As a majority of development activities are not
commercialized, it seems reasonable that putting such strict tests into effect should ensure that
there are impediments to recklessly capitalizing expenditures as intangible assets.

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a. All these criteria are also relevant for tangible assets. The tangible quality of a machine or
building easily establishes that most of these criteria are met. Tangibility does not
establish that there is a market or use for the assets so management may have to prove
this point as there may be impairment in the asset’s carrying value.
b.
Criteria Evidence
Technical feasibility There is evidence the machine works.
Management intention to Using the machine proves intent.
use or sell
Ability to use or sell Using establishes ability to use.
Demonstrate there is an Use does not establish this point. If there is uncertainty or doubt,
external market or internal then tests to determine if the asset’s value has been impaired
use should be completed.
Adequate resources to Use established that the process is complete.
complete
Reliable measurement of The amount paid ($20 million) is easily determined and proved.
expenditures
a. Dr. Research expense 3,000,000

Cr. R&D costs 3,000,000
Testing on animals, even if successful, does not prove that it is effective on humans.
Fails the technical feasibility criterion.
b. Dr. Research expense 10,000,000

Cr. R&D costs 10,000,000
Mixed test results do not prove the drug is effective on humans. Fails the technical
feasibility criterion.
c. Dr. Development costs (asset) 30,000,000

Cr. R&D costs 30,000,000
Meets all six criteria for capitalization.
d. Dr. Research expense 35,000,000

Cr. R&D costs 35,000,000
Company does not have resources to complete, so it must expense the costs.

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a. Dr. Research expense 50,250,000

Dr. Development costs (asset) 6,750,000
Cr. R&D costs 57,000,000
Only one of the five drugs meets all six criteria. Unless costs such as supplies, rent, and
utilities can be reliably attributable to the successful drug, they should be expensed.
Most likely difficult to assign, so should expense. Allocated head office overhead is not
reliably attributable to the successful drug and must be expensed. 15% of the salaries
($6,750,000) could likely be assigned to the successful drug.
b. Dr. Research expense 45,000,000

Cr. R&D costs 45,000,000
Company has not established market and technical feasibility, therefore expense.
c. Dr. Research expense 70,000,000

Cr. R&D costs 15,000,000
Cr. Development costs (asset) 55,000,000
Expense all of current year’s R&D costs ($15m) and write off prior year’s capitalized
development costs ($55m).
a. Do not amortize as the right is perpetual. Annually revisit this amount to see if there is
impairment in value.
b. Expense the $40,000,000 as this does not qualify as a development cost. This is an
ongoing operating expense to maintain and enhance the brand.
c. Amortize over two years as this is the expected duration of the product promotion
strategy. There is no evidence provided that there is a use after this advertising campaign
ends.
d. Amortize over the six-year reasonably estimated useful life of the drug.

a. Finite life – amortize Indefinite life – do Potentially either
not amortize
Goodwill 
Brand name 
Copyright 
Customer list 
Franchise 
Industrial design 
Licensing 
arrangement
Patent 
Supply agreement 
Trademark 

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b. Franchises, licensing arrangements, and supply agreements may be granted for a specific
period, an indefinite period, or in perpetuity. Limited life intangibles arising from
contractual arrangements are amortized. Indefinite life and perpetual intangibles arising
from contractual arrangements are amortized only if their useful life is expected to be
limited.
a. Intangible asset with indefinite life. Do not amortize but annually check for impairment
in value.
b. Without additional information, should expense this cost, as there is not sufficient
evidence to establish that there is a demonstrated market for the book when it is finished.
c. Amortize over not more than 20 years as this is consistent with the financial analysis.
May consider reducing the amortization period to 10 years as much of the fame of the
band and its music will likely have evaporated by then.
d. Amortize the $15,000,000 over the three-year term of the contract. If the renewal option
is exercised later, amortize that fee over four years. It is not reasonable to amortize the
entire amount of $25,000,000 over seven years as this is contingent on renewing the
option, which is not reasonably certain to occur at this point in time.
Remaining ÷ Months of × Months of

amortizable useful life amortization in = Amount of
amount remaining year amortization
2013 Apr-Dec $24,000,000 144 9 $1,500,000
2014 $22,500,000 135 12 $2,000,000*
2015 Jan-Sep $20,500,000 123 9 $1,500,000

2015 Oct-Dec 23,000,000** 114 3 605,263
2015 Total 2,105,263
2016 $22,394,737 111 12 $2,421,053

* Can be alternately computed as $24,000,000 / 12 years = $2,000,000 / year.
** 2015 Oct 1 Remaining amortizable amount = $20,500,000 – $1,500,000 + $4,000,000 =
$23,000,000. The cost of defending the patent should be included in the cost of the
patent.
We must first determine the cash equivalent sales price using present value techniques and then
allocate the proceeds.

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The fair value of the note receivable is determined using present value techniques.
 PVFA(6.0%, 6) = 1/0.06 - 1/0.06(1.06)6 = 4.917324
 PV of the note = $1,000,000 × PVFA(6.0%, 6) = $1,000,000 x 4.917324 = $4,917,324
Or using a BAII PLUS financial calculator

6 N, 6.0 I/Y, 1,000,000 PMT, CPT PV = –4,917,324 (rounded)
Allocation of sales proceeds

Cash $2,000,000
Fair value of the note receivable 4,917,324
Sales proceeds to be allocated $6,917,324
Inventory $ 110,000
Equipment 1,300,000
Patent 3,000,000
Trademark 55,000
Allocated to identifiable assets 4,465,000
Unattributed (goodwill arising on sale) 2,452,324
Total $6,917,324
Dr. Cash 2,000,000

Dr. Note receivable 4,917,324
Cr. Inventory 100,000
Cr. Gain on sale of division - inventory 10,000
Cr. Equipment 2,000,000
Dr. Accumulated depreciation equipment 600,000
($2,000,000 – $1,400,000)
Dr. Loss on sale of division – equipment 100,000
Cr. Patent 20,000
Cr. Gain on sale of division – patent 2,980,000
Cr. Trademark 10,000
Cr. Gain on sale of division - trademark 45,000
Cr. Gain on sale of division – goodwill 2,452,324
Preliminaries
 The fair market value of the note was $1.8 million as the interest rate charged approximated
the market rate of interest for similar transactions.
 The $240,000 cost of the copyright defence would have been capitalized in 2014.
Depreciation of $20,000 ($240,000 / 12) would have been expensed in each of 2014 - 2016.
Hence the book value of the copyright is $180,000 ($240,000 – (3 × $20,000)).
 The book value of the goodwill is $225,000 ($310,000 paid less the $85,000 impairment).

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Allocation of sales proceeds

Cash $2,700,000
Fair value of the note 1,800,000
Sales proceeds to be allocated $4,500,000
Land $2,100,000
Building and equipment 1,000,000
Copyright 850,000
Allocated to identifiable assets 3,950,000
Unattributed (goodwill arising on sale) 550,000
Total $4,500,000
Dr. Cash 2,700,000

Dr. Note receivable 1,800,000
Cr. Land 1,000,000
Cr. Gain on sale of division – land 1,100,000
Cr. Building and equipment 1,200,000
Dr. Accumulated depreciation building and equipment 450,000
($1,200,000 – $750,000)
CR. Gain on sale of division – building and equipment 250,000
Cr. Copyright 180,000
Cr. Gain on sale of division – copyright 670,000
Cr. Goodwill 225,000
Cr. Gain on sale of division – goodwill 325,000
Carrying
($000’s) value Fair value
Cash $ 4,000 $ 4,000
Accounts receivable 35,000 32,000
Inventories 45,000 41,000
Prepaid expenses 3,000 0
PPE, net 100,000 132,000
Intangible assets 1 25,000
Total assets 187,001 234,000
Total liabilities 120,000 115,000
Net assets $ 67,001 119,000
Purchase price 119,000
Accounting goodwill $ 0

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Carrying
Cash $ 7,000 $ 7,000
Prepaid expenses 2,000 1,000
PPE, net 90,000 102,000
Total assets 167,000 202,000
Net assets $ 75,000 97,000
Accounting goodwill $ 24,000
Carrying
Cash $ 9,000 $ 9,000
PPE, net 167,000 112,000

Total assets 294,001 264,000
Net assets $103,001 89,000
Accounting goodwill $ 6,000
a. Economic profit is the earnings of the firm that exceed its risk-adjusted required rate of
return on equity. For example, suppose a company has owners’ equity of $2 million and
it should earn a rate of return on equity of 15% ($300,000) considering the company’s
risk, while the business actually earns a return on equity of 18% ($360,000). The
economic profit would be $60,000 (3% × $2,000,000). In comparison, accounting net
income would have been $360,000.
b. Accounting net income does not include a charge for the implicit cost of equity financing
(like the interest cost on debt financing). Accounting net income ignores the fact that
owners reasonably expect a reward for their investment of funds. Accounting net income
should be reduced by an imputed capital charge for the shareholders’ equity investment
in the firm. The economist would say that the company is profitable only if its rate of

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return on equity exceeds its cost of equity capital. In management accounting this has
been called residual income or economic value added. In economics it is called abnormal
earnings.
Economic profit would be $15 million for the year ($50 million – $350 million × 10%). If the
firm were to become more risky and accounting income were to remain at $50 million, then
economic profit would decrease, as the risk-adjusted rate of return would increase. For example,
if the required rate of return were to increase to 12%, then economic profit would decrease to
$8 million ($50 million – $350 million × 12%).
The future stream of income is a perpetuity so its present value equals $900,000 / 13% =
$6,923,000 (rounded to the nearest thousand). Since economic goodwill is the amount in excess
of the invested capital of $6,000,000, economic goodwill is $923,000.
If this amount were negative, this would mean that the company is not profitable in an economic
sense. The rate of return the firm earns is less than the required rate of return expected by
owners. The owners are not being compensated for their investment and the risk they are
assuming by tying up their funds in this venture. The firm is not earning sufficient profit to cover
the opportunity cost of its equity financing.
As risk increases the discount rate (cost of capital) must increase to compensate for the higher
risk; if the economic goodwill is negative it means that after adjusting for risk and the time value
of money the investment is unsuccessful or unprofitable.
First Reason: As the text of this chapter notes, the market for mineral resources is well
established; the market for ideas is not. The output of the exploration has a defined market and
selling price, as commodities can be objectively valued and readily sold. The output of research
by its nature is not defined as this is precisely what research is—new knowledge.
Second Reason: Most exploration, especially by smaller operators, is done using a combination
of joint ventures and a portfolio of exploration projects. By diversifying the exploration process
into numerous small projects it becomes reasonable to expect some of the undertakings to be
successful.
Third Reason: For small, junior public companies it is helpful to appear less unprofitable and
have more assets and equity. This can increase the firm’s overall net book value and make it
easier to raise new financing. Mineral exploration companies require significant up-front
investments, and only much later are there cash inflows. Therefore it is essential for the firm to
be able to raise funds for exploration and development to allow for their survival. For these
companies geology is far more important than the financial statements; investors look more

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closely at the assay reports (about the existence and concentration of ore) than the financial
reports and statements.
Fourth Reason: Political pressure. Mineral exploration is vital to many countries and regions.
Political lobbies and other influencers have dissuaded regulators from forcing the expensing of
exploration costs. Vested interests have argued that expensing these costs would destroy the
industry as they would look less financially attractive and therefore not be able to raise financing
for exploration and development. While these views may be financially naive, they are not
politically naive.
Fifth Reason: Users of financial statements can easily ignore and implicitly expense mineral
exploration costs if they disagree with the deferral approach.
Sixth Reason: Capitalization of exploration costs may reduce the constraints of some debt
solvency encumbrances.
Item T/F Explanation

a. Costs of mineral production are F The costs of mineral production are capitalized
expensed. into inventories. The expense is recorded when
the minerals are sold.
b. Costs incurred in the development T With the site in the development phase, there is
phase are capitalized until an expectation of future benefit flowing from
production begins. the site.
c. Costs incurred in exploration are F Exploration costs are expensed when the site is
expensed as incurred determined to be a failure.
d. Costs incurred in exploration are T This is one of two policies acceptable under
capitalized until the feasibility of IFRS.
the mineral site has been
determined
2018 Dr. Intangible assets – Andromeda site 2,380,000

Dr. Intangible assets – Bode site 950,000
Cr. Cash 3,330,000
2019 Dr. Intangible assets – Andromeda site 1,470,000

Dr. Intangible assets – Bode site 1,950,000
Cr. Cash 3,420,000
Dr. Exploration and evaluation expense – Bode site 2,900,000

Cr. Intangible assets – Bode site 2,900,000

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2018 Dr. Intangible assets – exploration and evaluation 3,330,000

Cr. Cash 3,330,000
2019 Dr. Intangible assets – exploration and evaluation 3,420,000

Cr. Cash 3,420,000
Production volume 15,000

Reserves – beginning of year 240,000
Rate for depletion and depreciation 6.25%
Depletion Depreciation
Costs capitalized $754,000 $1,348,000
Rate for depletion and depreciation 6.25% 6.25%
Amount of depletion or depreciation $ 47,125 $ 84,250
Alpha Hills:
Dr. Cash 34,500,000
Cr. Revenue 34,500,000
Dr. Operating expenses (or inventories) 15,000,000
Cr. Cash 15,000,000
Dr. Depletion expense (or inventories) (30/200 × $30m) 4,500,000
Cr. Accum. depl. – exploration costs – Alpha Hills 4,500,000
Dr. Depreciation expense (or inventories) (30/200 × $20m) 3,000,000
Cr. Accum. depr. – development costs – Alpha Hills 3,000,000
Beta Valley:
Dr. PPE – development cost – Beta Valley 8,000,000
Cr. Cash 8,000,000
Chi Canyon:
Dr. Intangible asset – exploration costs – Chi Canyon 5,000,000
Cr. Cash 5,000,000
Delta Ridge:
Dr. Exploration expense 2,000,000
Cr. Cash 2,000,000
Research and development project:

Dr. R&D expense 12,000,000
Cr. Cash 12,000,000

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Under the full cost method, exploration costs are capitalized independent of whether the
exploration is successful. Furthermore, exploration costs are not identified by location, and the
pool of exploration costs are depleted on a units-of-production basis.
Record exploration costs incurred at Chi Canyon and Delta Ridge

Dr. Intangible asset – exploration costs 5,000,000
Dr. Intangible asset – exploration costs 2,000,000
Cr. Cash 7,000,000
Record development costs incurred in Beta Valley:

Dr. PPE – development cost – Beta Valley 8,000,000
Cr. Cash 8,000,000
Record production revenue, operating expenses, depreciation, and depletion:

Dr. Cash 34,500,000
Cr. Revenue 34,500,000
Dr. Operating expenses (or inventories) 15,000,000
Cr. Cash 15,000,000
Dr. Depletion expense (or inventories) 5,550,000

(30/200 × ($30m+$7m))
Cr. Accum. depl. – exploration costs 5,550,000
Dr. Depreciation expense (or inventories) 3,000,000
(30/200 × $20m)
Cr. Accum. depr. – development costs – Alpha Hills 3,000,000
Record costs incurred in the research and development project:

Dr. R&D expense 12,000,000
Cr. Cash 12,000,000

9-274
Successful efforts method

($000’s) 2009 2010 2011 2012 2013 2014 2015 2016
Cash 45,000 38,000 30,000 20,000 9,000 31,000 66,000 75,000
Capitalized E&D costs 0 0 0 10,000 21,000 14,000 5,250 0
Total assets 45,000 38,000 30,000 30,000 30,000 45,000 71,250 75,000
Share capital 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000
Retained earnings (deficit) (5,000) (12,000) (20,000) (20,000) (20,000) (5,000) 21,250 25,000
Total owners’ equity 45,000 38,000 30,000 30,000 30,000 45,000 71,250 75,000
Revenue 0 0 0 0 0 26,000 40,000 12,000

Exploration costs (5,000) (7,000) (8,000) 0 0 0 0 0
Extraction costs 0 0 0 0 0 (4,000) (5,000) (3,000)
Amortization of
0 0 0 0 0 (7,000) (8,750) (5,250)
capitalized E&D costs
Net income (loss) (5,000) (7,000) (8,000) 0 0 15,000 26,250 3,750
In the above table, the amortization of E&D costs is computed as follows:

2014 2015 2016
E&D costs capitalized, beginning of year 21,000,000 14,000,000 5,250,000
Total estimated ore reserves, beginning of year ÷ 6,000,000 ÷ 4,000,000 ÷ 1,500,000
Cost deferred per unit of ore 3.50 3.50 3.50
Production during year × 2,000,000 × 2,500,000 × 1,500,000
Amount to amortize for year $7,000,000 $8,750,000 $5,250,000
E&D costs, end of year 14,000,000 5,250,000 0

9-275
Full-cost method
($000’s) 2009 2010 2011 2012 2013 2014 2015 2016
Cash 45,000 38,000 30,000 20,000 9,000 31,000 66,000 75,000
Capitalized E&D costs 5,000 12,000 20,000 30,000 41,000 27,333 10,250 0
Total assets 50,000 50,000 50,000 50,000 50,000 58,333 76,250 75,000
Share capital 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000
Retained earnings (deficit) 0 0 0 0 0 8,333 26,250 25,000
Total owners’ equity 50,000 50,000 50,000 50,000 50,000 58,333 76,250 75,000
Revenue 0 0 0 0 0 26,000 40,000 12,000

Exploration costs 0 0 0 0 0 0 0 0
Extraction costs 0 0 0 0 0 (4,000) (5,000) (3,000)
Amortization of
0 0 0 0 0 (13,667) (17,083) (10,250)
capitalized E&D costs
Net income (loss) 0 0 0 0 0 8,333 17,917 (1,250)
In the above table, the amortization of E&D cost is computed as follows:

2014 2015 2016
E&D costs capitalized, beginning of year 41,000,000 27,333,333 10,250,000
Total estimated ore reserves, beginning of year ÷ 6,000,000 ÷ 4,000,000 ÷ 1,500,000
Cost deferred per unit of ore 6.8333 6.8333 6.8333
Production during year × 2,000,000 × 2,500,000 × 1,500,000
Amount to amortize for year $13,666,667 $17,083,333 $10,250,000
E&D costs, end of year 27,333,333 10,250,000 0
a. Gross method
i. Dr. Cash or government grant receivable 750,000
Cr. Other income (government grant) 750,000
ii. No entry. Subsidy goes to buyers of turbines, not the sellers. Of course, the sellers also
benefit as a result of higher demand for the turbines, which should result in higher sales
volume or higher sale prices.
iii. Dr. Cash or government grant receivable 1,400,000

Cr. Deferred income 1,400,000

9-276
b. Net method
i. Dr. Cash or government grant receivable 750,000
Cr. R&D expense 750,000
ii. No entry. —
iii. Dr. Cash or government grant receivable 1,400,000

Cr. PPE (turbine factory) 1,400,000
a. Gross method
i. Dr. Cash 20,000
ii. Dr. Cash 200,000

Cr. Deferred income 200,000
iii. Dr. Cash ($3,000,000 × 4%) 120,000

Cr. Deferred income 120,000
b. Gross method
Dr. Deferred income 16,000
(($200,000 + $120,000) / 20)*
Dr. Depreciation expense 180,000

Cr. Accumulated depreciation 180,000
(($4,000,000 - $400,000) / 20))
*The forgivable loan is taken into income on the same basis that is used to
depreciate the asset (20 years), rather than the period of the loan (5 years).

9-277
c. Net method
i. Dr. Cash 20,000
Cr. Property tax expense 20,000
ii. Dr. Cash 200,000

Cr. PPE (research facility) 200,000
iii. Dr. Cash ($3,000,000 × 4%) 120,000

Cr. PPE (research facility) 120,000
d. Net method
Dr. Depreciation expense 164,000
Cr. Accumulated depreciation 164,000
((($4,000,000 - $400,000 – ($200,000 + $120,000)) / 20)))
a. Journal entries:
i. Dr. Factory 100,000,000
Cr. Cash 100,000,000
ii. Dr. Land 5,000,000

Cr. Other income – government grant 5,000,000
iii. Dr. Property taxes payable (25% × 1,600,000) 400,000

Cr. Property tax expense 400,000
iv. Dr. Cash 15,000,000

Cr. Factory 15,000,000
v. Dr. Cash 4,000,000

Cr. Compensation expense 4,000,000
vi. Dr. Cash 2,000,000

Cr. Other income – government grant 2,000,000
vii. It is not reasonable to accrue any of this amount, as its realization in five years is
contingent on meeting a standard that is challenging and potentially not attainable.
Further, in the first year, the goal of employing 700 workers was not met.
b. The annual depreciation will be (100,000,000 – 15,000,000) / 30 years = 2,833,333/year.

c. Effect of subsidies on income:
Item Year 1 Year 2
Free land $5,000,000
Property tax discount (25% of 1,600,000) 400,000 $ 400,000
Training subsidy ($4,000,000 per year) 4,000,000 4,000,000

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Grant for past employment (one-time) 2,000,000

Forgivable loan on factory (reduces factory cost by $15,000,000;
therefore depreciation decreases by $15,000,000/30 years; no
depreciation in first year according to company policy) 0 500,000
Total $11,400,000 $4,900,000
a. Amounts in $millions
Depreciation / amortization begins in 2014 when production begins.
Depreciable amount is cost adjusted by government subsidy of 20% for plant and equipment and
40% for development costs.
At the beginning of 2020, the portions of the subsidies relating to the remaining used life of the
plant and equipment need to be repaid. For the plant, the repayment is 14 years / 20 years × $20
million = $14 million. For the equipment, the repayment is 4 years / 10 years × $12 million =
$4.8 million.
Under IFRS, when government grants / subsidies need to repaid due to failure to comply with
grant stipulations, the cumulative additional depreciation that would have been recognized
without the grant needs to be recognized immediately in income.
Plant Net
Depre- Cost after Accum. carrying
Year ciation Gross cost subsidy depr. value
2011
2012
2013 0 100 80 0 80
2014 4 100 80 ( 4.0) 76
2015 4 100 80 ( 8.0) 72
2016 4 100 80 (12.0) 68
2017 4 100 80 (16.0) 64
2018 4 100 80 (20.0) 60
2019 4 100 80 (24.0) 56
2020: Repayment of subsidy +14 +14
2020: Cumulative effect 4.2 ( 4.2) (4.2)
2020: Subtotal 94 (28.2) 65.8
2020: Annual depreciation 4.7 100 94 (32.9) 61.1
2021 4.7 100 94 (37.6) 56.4
2022 4.7 100 94 (42.3) 51.7
2023 4.7 100 94 (47.0) 47.0
2024 4.7 100 94 (51.7) 42.3
2025 4.7 100 94 (56.4) 37.6
2026 4.7 100 94 (61.1) 32.9
2027 4.7 100 94 (65.8) 28.2

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2028 4.7 100 94 (70.5) 23.5

2029 4.7 100 94 (75.2) 18.8
2030 4.7 100 94 (79.9) 14.1
2031 4.7 100 94 (84.6) 9.4
2033 4.7 100 94 (89.3) 4.7
2034 4.7 100 94 (94.0) 0.0
Equipment Net
2011
2012
2013 0 60 48 0 48.0
2014 4.8 60 48 ( 4.8) 43.2
2015 4.8 60 48 ( 9.6) 38.4
2016 4.8 60 48 (14.4) 33.6
2017 4.8 60 48 (19.2) 28.8
2018 4.8 60 48 (24.0) 24.0
2019 4.8 60 48 (28.8) 19.2
2020: Repayment of subsidy +4.8 +4.8
2020: Cumulative effect 2.88 . ( 2.88) ( 2.88)
2020: Subtotal 52.8 (31.68) 21.12
2020: Annual depreciation 5.28 60 52.8 (36.96) 15.84
2021 5.28 60 52.8 (42.24) 10.56
2022 5.28 60 52.8 (47.52 5.28
2023 5.28 60 52.8 (52.80) 0.00
Intangible asset – Net

development costs Amort- Cost after Accum. carrying
Year ization Gross cost subsidy amort. value
2011
2012
2013 0 12 7.2 0 7.20
2014 0.36 12 7.2 (0.36) 6.84
2015 0.36 12 7.2 (0.72) 6.48
2016 0.36 12 7.2 (1.08) 6.12
2017 0.36 12 7.2 (1.44) 5.76
2018 0.36 12 7.2 (1.80) 5.40
2019 0.36 12 7.2 (2.16) 5.04
2020 5.04 12 7.2 (7.20) 0.00
Note that the intangible asset relates to costs incurred to development the solar power generator,
so it is impaired with a recoverable amount of zero in year 2020, so the balance should be written
off. Impairment is covered in Chapter 10.

9-280
b. Journal entries
2011 Dr. Research expense 20,000,000
Cr. Cash 20,000,000
Dr. Government grant receivable or cash 8,000,000
Cr. Research expense (40% × $20,000,000) 8,000,000
2012 Dr. Development expense 18,000,000

Dr. Intangible asset – development costs 12,000,000
Cr. Cash 30,000,000
Cr. Intang. asset – dev. cost (40%×$12,000,000) 4,800,000
2013 Dr. Production plant 100,000,000

Dr. Equipment 60,000,000
Cr. Cash 160,000,000
Cr. Production plant (20% × $100,000,000) 20,000,000
Cr. Equipment (20% × $60,000,000) 12,000,000
2014 Dr. Inventories ($80,000,000 / 20 years) 4,000,000

Dr. Accumulated depreciation – plant 4,000,000
Dr. Inventories ($48,000,000 / 10 years) 4,800,000
Cr. Accumulated depreciation – equipment 4,800,000
Dr. Inventories ($7,200,000 / 20 years) 360,000
Cr. Accum. amort. – intangible asset – dev. cost 360,000
2020 Repayment of government grant:

Dr. Production plant (14 years / 20 years × $20,000,000) 14,000,000
Dr. Equipment (4 years / 10 years × $12,000,000) 4,800,000
Cr. Cash 18,800,000
Cumulative effect of repayment on prior depreciation

Dr. Depreciation expense – loss on grant repayment 7,080,000
Cr. Accumulated depreciation – plant 4,200,000
Annual depreciation:
Impairment of intangible asset for development costs

Dr. Loss on impairment 5,040,000
Cr. Accum. amort. – intangible asset – dev. Cost 5,040,000

9-281
a. Amounts in $millions
Depreciation / amortization begins in 2014 when production begins.
Depreciable amount is cost adjusted by government subsidy of 20% for plant and equipment and
40% for development costs.
At the beginning of 2020, the portions of the subsidies relating to the remaining used life of the
plant and equipment need to be repaid. For the plant, the repayment is 14 years / 20 years × $20
million = $14 million. For the equipment, the repayment is 4 years / 10 years × $12 million =
$4.8 million.
Under ASPE, there is no cumulative adjustment for past depreciation that would have been
recognized in the absence of the grant. The adjustments are prospective.
Plant Net
2011
2012
2013 0 100 80 0 80
2014 4 100 80 ( 4) 76
2015 4 100 80 ( 8) 72
2016 4 100 80 (12) 68
2017 4 100 80 (16) 64
2018 4 100 80 (20) 60
2019 4 100 80 (24) 56
2020: Repayment of subsidy +14 +14
2020: Subtotal 94 (24) 70
2020: Annual depreciation 5 100 94 (29) 65
2021 5 100 94 (34) 60
2022 5 100 94 (39) 55
2023 5 100 94 (44) 50
2024 5 100 94 (49) 45
2025 5 100 94 (54) 40
2026 5 100 94 (59) 35
2027 5 100 94 (64) 30
2028 5 100 94 (69) 25
2029 5 100 94 (74) 20
2030 5 100 94 (79) 15
2031 5 100 94 (84) 10
2033 5 100 94 (89) 5
2034 5 100 94 (94) 0

9-282
Equipment Net
2011
2012
2013 0 60 48 0 48.0
2014 4.8 60 48 ( 4.8) 43.2
2015 4.8 60 48 ( 9.6) 38.4
2016 4.8 60 48 (14.4) 33.6
2017 4.8 60 48 (19.2) 28.8
2018 4.8 60 48 (24.0) 24.0
2019 4.8 60 48 (28.8) 19.2
2020: Repayment of subsidy +4.8 . +4.8
2020: Subtotal 52.8 (28.8) 24.0
2020: Annual depreciation 6 60 52.8 (34.8) 18.0
2021 6 60 52.8 (40.8) 12.0
2022 6 60 52.8 (46.8) 6.0
2023 6 60 52.8 (52.8) 0.0
Intangible asset – Net

development costs Amort- Cost after Accum. carrying
Year ization Gross cost subsidy amort. value
2011
2012
2013 0 12 7.2 0 7.20
2014 0.36 12 7.2 (0.36) 6.84
2015 0.36 12 7.2 (0.72) 6.48
2016 0.36 12 7.2 (1.08) 6.12
2017 0.36 12 7.2 (1.44) 5.76
2018 0.36 12 7.2 (1.80) 5.40
2019 0.36 12 7.2 (2.16) 5.04
2020 5.04 12 7.2 (7.20) 0.00
Note that the intangible asset relates to costs incurred to development the solar power generator,
so it is impaired with a recoverable amount of zero in year 2020, so the balance should be written
off. Impairment is covered in Chapter 10.

9-283
b. Journal entries
2011 Dr. Research expense 20,000,000
Cr. Cash 20,000,000
Cr. Research expense (40% × $20,000,000) 8,000,000
2012 Dr. Development expense 18,000,000

Dr. Intangible asset – development costs 12,000,000
Cr. Cash 30,000,000
Cr. Intang. asset – dev. cost (40%×$12,000,000) 4,800,000
2013 Dr. Production plant 100,000,000

Dr. Equipment 60,000,000
Cr. Cash 160,000,000
Cr. Production plant (20% × $100,000,000) 20,000,000
Cr. Equipment (20% × $60,000,000) 12,000,000
2014 Dr. Inventories ($80,000,000 / 20 years) 4,000,000

Dr. Inventories ($7,200,000 / 20 years) 360,000
Cr. Accum. amort. – intangible asset – dev. cost 360,000
2020 Repayment of government grant:

Dr. Production plant (14 years / 20 years × $20,000,000) 14,000,000
Dr. Equipment (4 years / 10 years × $12,000,000) 4,800,000
Cr. Cash 18,800,000
Annual depreciation:
Impairment of intangible asset for development costs

Dr. Loss on impairment 5,040,000
Cr. Accum. amort. – intangible asset – dev. Cost 5,040,000

9-284
a. Canadian Tire’s balance sheet as at December 28, 2013 and Note 14 reported goodwill and
intangible assets totaling $1,185.5 million as set out below:
Asset Balance – 12/28/2013 ($millions)

Goodwill $432.9
Banners and trademarks $245.2

Franchise agreements 154.3
Total indefinite life intangibles excluding goodwill $399.5
Software $340.2
Other intangibles 12.9
Total finite life intangibles $353.1
Total intangibles and goodwill $1,185.5
Intangibles and goodwill / total assets = $1,185.5 / $13,630.0 = 8.7%
b. The average remaining useful life of finite intangible assets can be estimated as the net
amount of finite intangible assets divided by the annual amortization. At the end of 2013,
the estimated average remaining useful life of the software is $353.1m / $91.5m per year =
3.9 years. (The amortization figure is reported in Note 32).
c. As reported in Note 14, $71.1 million of the combined purchase price of the acquisitions
was attributed to intangibles. Of this amount, $56.0 million was allocated to goodwill; $3.0
million to banners and trademarks; $11.5 million to franchise agreements; and $0.6 million
to other intangible assets.
a. At the end of 2013, Thomson Reuters’s balance sheet shows intangible assets totalling
$9,512 million. This is comprised of $1,622 million in computer software and $7,890
million in other identifiable intangible assets. Separately, goodwill amounted to
$16,871million. Intangible assets and goodwill together accounted for $26,383 million or
81.3% of the $32,439 million in total assets.
b. The average remaining useful life of intangible assets can be estimated as the net amount
of intangible assets divided by the annual amortization. At the end of 3013, the estimated
average remaining useful life of computer software is $1,622m / $773m per year = 2.1
years. For other intangible assets, this figure is $7,890m / $641m per year = 12.3 years.
(Amortization figures are available from the income statement.) There is no corresponding
calculation for goodwill since goodwill is not amortized because it has an indefinite life.
c. “Other identifiable intangible assets” include trade names, customer relationships,
databases and content, and other intangible assets, as described in the portion of Note 1
dealing with intangible assets.

9-285
d. The estimated average remaining useful lives are:

Trade names with finite lives: $130m / $41m = 3.2 years
Customer relationships: $4,154m / $465m = 8.9 years
Databases and content: $401m / $68m = 5.9 year
Other: $559m / $67m = 8.3 years.
These estimates are lower that the estimate of 12.3 years from part (b) because the
calculation in part (b) included intangible assets with indefinite lives. Excluding the $2,646
million of trade names with indefinite useful lives, the estimate becomes ($7,890m –
$2,646m) / $641m = 8.2 years, which is within the range of useful lives for the four
categories.
a. Note 7 of the financial statements (page 133) shows that $123 million of labour cost had
been capitalized into “intangible assets subject to amortization.”
b. Using information from Note 17, page 150, the estimate for the average remaining useful
life is $872m / $376m = 2.32 years or 28 months. This length of time looks reasonable
considering the rapid advances in software.
c. Intangible assets is comprised of primarily “Spectrum licenses” of $5,168 million. (The
remainder of $7 million relates to an acquired brand.) In Note 17(c), the company explains
the following: “Industry Canada’s spectrum licence policy terms indicate that the spectrum
licences will likely be renewed. We expect our spectrum licenses to be renewed every 20
years following a review by Industry Canada of our compliance with licence terms. In
addition to current usage, the Company’s licensed spectrum can be used for planned and
new technologies. As a result of the combination of these significant factors, the
Company’s spectrum licences are currently considered to have indefinite lives.”
a. As shown in Note 6 or Note 20, the company spent $119 million of exploration and
evaluation assets.
b. As shown in Note 6 below, $84 million was transferred from mineral exploration and
evaluation to PPE.

9-286

9-287

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Chapter 9

Intangible Assets, Goodwill,

P9-1. Suggested solution:

P9-2. Suggested solution:

P9-3. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-4. Suggested solution:

P9-5. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-6. Suggested solution:

P9-7. Suggested solution:

a. Arguments in support of expensing:

Copyright © 2017 Pearson Canada Inc.

b. Arguments in support of capitalizing:

P9-8. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-9. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-10. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-11. Suggested solution:

P9-12. Suggested solution:

a. Dr. Research expense 3,000,000

b. Dr. Research expense 10,000,000

c. Dr. Development costs (asset) 30,000,000

d. Dr. Research expense 35,000,000

Copyright © 2017 Pearson Canada Inc.

P9-13. Suggested solution:

a. Dr. Research expense 50,250,000

b. Dr. Research expense 45,000,000

c. Dr. Research expense 70,000,000

P9-14. Suggested solution:

P9-15. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-16. Suggested solution:

P9-17. Suggested solution:

Remaining ÷ Months of × Months of

2014 $22,500,000 135 12 $2,000,000*

2015 Jan-Sep $20,500,000 123 9 $1,500,000

2016 $22,394,737 111 12 $2,421,053

P9-18. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

Or using a BAII PLUS financial calculator

Allocation of sales proceeds

Dr. Cash 2,000,000

P9-19. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

Allocation of sales proceeds

Dr. Cash 2,700,000

P9-20. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-21. Suggested solution:

P9-22. Suggested solution:

PPE, net 167,000 112,000

P9-23. Suggested solution:

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P9-24. Suggested solution:

P9-25. Suggested solution:

P9-26. Suggested solution:

Copyright © 2017 Pearson Canada Inc.

P9-27. Suggested solution:

Item T/F Explanation

P9-28. Suggested solution: