ACCOUNTING 3620 FALL 2015

QUIZ # 2 (5 Points)

Name____________________

The number of points of the respective questions is indicated in parentheses.

Problem 1 (2 Points)
On January 1, 2013, State Rate Software, Inc. began working on a commercial software
package that will predict the likelihood that individual states in the United States will be
able to pay their various obligations. The owners of State Rate initially hoped that investors
would purchase the software in order to enable them to make better investment decisions.
During the period January 1, 2013 to August 31, 2013, State Rate incurred a total of
$ 900,000 of costs to build the forecasting model, and develop the software. On September
1, 2013, State Rate decided that their software was technologically feasible, as evidenced by
the fact that Big Bucks Bank offered them $ 2,000,000 for their software package.
State Rate declined the offer of Big Bucks, and continued to fine tune their software.
During the period September 1, 2013 to December 31, 2013, State Rate incurred a total of
$ 500,000 of costs to finish programming, test, and debug their software, as well as develop
training manuals for the users.
On January 1, 2014, State Rate Software was available for purchase. State Rate decided
that they would sell this version of the software for three years, and that on January 1, 2017,
State Rate 2.0 would become available.
As of December 31, 2014, the actual results for State Rate, as well as expectations for the
future, were as follows:
2014 (Actual)
2015 (Projected)
2016 (Projected)
Sales
$ 8,000,000
$ 6,000,000
$ 6,000,000
Cost of Sales
2,400,000
1,800,000
1,800,000
Advertising
2,500,000
500,000
500,000
A. (1)

Assuming that State Rate capitalizes as much computer software cost as is

allowable under U.S. GAAP, how much cost would have been capitalized as of
December 31, 2013 (i.e. the date on which the software was completed)?

B. (1)

Refer to your answer to Part A. Assume that each year, State Rate amortizes the
minimum amount of capitalized software development costs allowable under U.S.
GAAP. How much capitalized software development cost would State Rate
amortize in 2015 assuming that the above projections are accurate?

Problem 2 (1 Point)
_____

A firm is a publicly traded company, and subject to SEC reporting

requirements. Under Current (2015) U.S. GAAP, which of the following is
(are) intangible assets which, if recorded on a balance sheet, would be
considered to have an indefinite life and would not be subject to
amortization?
A.

Patents

B.

Goodwill

C.

Neither A nor B would be amortized

D.

Both A and B would be amortized.

Problem 3 (1 Point)
On January 1, 2015, New Age Media acquired Old School Entertainment. At the time of
the acquisition, Old School Entertainment owned some Copyrights for movies that had been
produced by a movie production corporation on January 1, 1950. Old School had purchased
these movies from the production corporation in 1975, at a cost of $ 600,000.
At the time of the acquisition, New Age Media believed that these copyrights had a fair
value of $ 3,000,000. The copyrights expire on January 1, 2045, which incorporates the 20
year copyright extension law that was enacted in the late 1990s.
Based on the information provided above, how much amortization, if any, should New
Age Media report for the copyrights during the year ending December 31, 2015?

Problem 4 (1 Point)
The following statement is TRUE / FALSE (circle one):
Under Current (2015) U.S. GAAP, if an intangible asset has a finite life, the
maximum amortization period related to the asset is 40 years.

SOLUTION TO ACCT 3620 QUIZ # 2 FALL 2015

Problem 1
A. $ 500,000 is the amount that would have been capitalized as of December 31, 2013.
Under Current U.S. GAAP, a firm my capitalize software development costs once
the firm has reached the stage of technological feasibility. Thus, any costs incurred
prior to September 1, 2013 would have been expensed. While the offer from Big
Bucks Bank might be useful in assessing that technological feasibility has been met,
The amount of the offer is not relevant to the answer to this problem.
B. $ 150,000 is the minimum capitalized software development costs that would be
amortized in 2015.
Once costs have been capitalized, in any given year U.S. GAAP requires a firm
to amortize software costs equal to the greater of the proportion of revenue related to
the product expected to be received in the upcoming year, or the amount that would be
amortized using the straight line method. In 2014, this amount amortized would be
$ 200,000, since:
(_ _$ 8_____) x $ 500,000 = $ 200,000 is greater than $ 500,000 = $ 166,666
8 + 6 +6
3 years
Thus, at the beginning of 2015, $ 300,000 of costs remain to be amortized. Of this
amount, $ 150,000 is amortized, as the % of Revenue and Straight-Line calculations
yield the same amount
(i.e. __$ 6___ x $ 300,000; $ 300,000 = $ 150,000 )
6 + 6
2 years
Problem 2
The correct answer is B. Goodwill is assumed to have an indefinite life, and is not
amortized. Any capitalized costs related to patents are amortized into income over the
shorter of the economic life of the patent or the remaining legal life.
Problem 3
On January 1, 2015, New Age Media would record the copyright related to the movie
At $ 3,000,000, which is the fair value of the move rights on the date of their acquisition.
Since the copyright expires on January 1, 2045, New Age Media would record $ 100,000
(i.e. $ 3,000,000 / 30 years) of amortization each year.
Problem 4
The statement is FALSE. Under 2015 US GAAP, the amortization period for an
intangible with a finite life is NOT capped. Thus, intangibles with a definite life may be
Amortized over long periods, such as 99 years.

ACCT 3620 FALL 2015

QUIZ 1 ANALYSIS
DISTRIBUTION BY TOTAL
Score
5
4-4.5
3.3.5
2-2.5
<2
Mean
Std. Dev.

Number
6
18
8
1
0
4.21
0.71

DISTRIBUTION BY QUESTION
Question
Avg.
1A
1B
2
3
4

0.86
0.58
0.95
0.94
0.88

Mean

4.21