2.0 Technical Accounting and Reporting BAR Practice Quiz

• A. A significant adverse change in the business climate such as a substantial loss of key customers representing 30% of the reporting unit's revenue, or a regulatory action that restricts a major product line
• B. The company's stock price increased 20% during the year, reflecting improved investor sentiment
• C. The company hired additional senior management, increasing operating expenses by 5%
• D. The company completed the integration of a prior acquisition and released integration reserves to income

Under ASC 350-20, qualitative factors (step zero assessment) that may indicate goodwill impairment include: a significant adverse change in legal factors or business climate; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; a more-likely-than-not expectation that a reporting unit will be sold or otherwise disposed of before the end of its previously estimated useful life; testing for recoverability of a significant asset group within the reporting unit; recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. Loss of 30% of revenue would be a significant adverse change in business climate that substantially reduces the reporting unit's projected cash flows, a clear impairment indicator requiring quantitative testing.

• A. Cost A: expense (preliminary project stage); Cost B: capitalize (application development stage); Cost C: expense (post-implementation/operation stage)
• B. All three costs should be capitalized because they are all necessary to bring the software system to its intended use
• C. All three costs should be expensed because internal-use software costs are always expensed under ASC 350-40
• D. Cost A: capitalize; Cost B: expense; Cost C: expense, only initial planning costs are capitalized

ASC 350-40 three-stage model for internal-use software: (1) Preliminary Project Stage, EXPENSE: includes activities such as conceptual formulation of alternatives, evaluation of alternatives, determination of existence of needed technology, and final selection of alternatives (examples: evaluating vendors, deciding whether to buy vs. build). Cost A falls in this stage → EXPENSE. (2) Application Development Stage, CAPITALIZE: includes design of chosen path, including software configuration and interfaces, coding, installation to hardware, and testing. Cost B falls in this stage → CAPITALIZE. (3) Post-Implementation/Operation Stage, EXPENSE: includes training, maintenance, and minor upgrades/enhancements that do not add major functionality. Cost C falls in this stage → EXPENSE. The capitalized costs (application development stage) are amortized on a straight-line basis over the software's estimated useful life, beginning when the software is ready for its intended use.

• A. Impairment loss = $8,000,000 (full goodwill write-off); Journal entry: Dr. Goodwill Impairment Loss $8,000,000 / Cr. Goodwill $8,000,000
• B. Impairment loss = $5,000,000; Journal entry: Dr. Goodwill Impairment Loss $5,000,000 / Cr. Goodwill $5,000,000
• C. Impairment loss = $0; goodwill cannot be impaired until the reporting unit's book value of net assets (excluding goodwill) exceeds fair value
• D. Impairment loss = $3,000,000; Journal entry: Dr. Goodwill Impairment Loss $3,000,000 / Cr. Accumulated Impairment. Goodwill $3,000,000

ASC 350 quantitative goodwill impairment test (post-2017 simplified approach): (1) Compare the fair value of the reporting unit to its carrying amount (including goodwill): Fair value = $20,000,000; Carrying amount = $25,000,000; (2) If carrying amount exceeds fair value, an impairment exists; (3) Impairment loss = Carrying amount − Fair value = $25,000,000 − $20,000,000 = $5,000,000; (4) The impairment loss is limited to the goodwill balance ($8,000,000); since $5,000,000 < $8,000,000, the full $5,000,000 impairment is recognized; (5) Journal entry: Dr. Goodwill Impairment Loss $5,000,000 / Cr. Goodwill $5,000,000. After impairment: Goodwill = $8,000,000 − $5,000,000 = $3,000,000. The simplified approach eliminated the need to calculate the 'implied fair value of goodwill', the impairment is simply the excess of carrying amount over fair value, capped at the goodwill balance.

• A. R&D expense = $2,545,000 (all four items are R&D costs to be expensed immediately)
• B. R&D expense = $2,500,000 (lab materials $800K + salaries $1,200K + equipment $500K); patent application fees of $45,000 are capitalized as an intangible asset
• C. R&D expense = $2,000,000 (lab materials + scientist salaries only); equipment is capitalized; patents are capitalized
• D. R&D expense = $800,000 (lab materials only); all other costs are capitalized as intangibles

ASC 730 R&D expense classification: (1) Laboratory materials ($800,000), direct research materials are R&D; EXPENSE; (2) Research scientist salaries ($1,200,000), personnel engaged in R&D activities are R&D; EXPENSE; (3) Equipment with no alternative future use ($500,000), ASC 730-10-25-2 requires that equipment acquired or constructed for R&D activities and having no alternative future uses shall be included in R&D costs at the time of acquisition or construction; EXPENSE immediately as R&D; (4) Patent application fees ($45,000), costs incurred after the research and development phase to protect a discovery are capitalized as intangible assets (patent); NOT R&D expense. Total R&D expense = $800,000 + $1,200,000 + $500,000 = $2,500,000.

• A. Year 1 expense: $100,000 ($8 × 50,000 / 4 years); APIC after 2 years: $200,000
• B. Year 1 expense: $95,000 ($8 × 50,000 × 95% / 4 years); APIC after 2 years: $190,000
• C. Year 1 expense: $95,000; APIC after 2 years: $380,000
• D. Year 1 expense: $400,000 ($8 × 50,000, full cost recognized at grant date); APIC after 2 years: $400,000

ASC 718 compensation expense calculation: Total compensation cost = Number of options × Expected to vest % × Grant date fair value = 50,000 × 95% × $8.00 = $380,000 total over 4 years. Annual expense = $380,000 / 4 years = $95,000 per year. Year 1 journal entry: Dr. Compensation Expense $95,000 / Cr. Additional Paid-in Capital. Stock Options $95,000. Cumulative APIC balance after Year 2: $95,000 × 2 = $190,000. This represents 2 years of the 4-year vesting schedule. Note: under the cliff vesting schedule, no shares vest until Year 4 (all options vest on a single date), but expense is still recognized ratably over the 4-year service period using the straight-line method for cliff-vesting awards.

• A. Goodwill = $3,000,000; it is recorded at historical cost because acquired goodwill is amortized over 15 years
• B. Goodwill = $0; the excess payment of $3,000,000 is recognized as acquisition expense in the current period
• C. Goodwill = $3,000,000; Journal entry records assets at FMV, liabilities at FMV, and goodwill for the excess of consideration over net assets
• D. Goodwill = $7,000,000; calculated as the excess of consideration over book value of the target's equity

ASC 805 goodwill calculation: Goodwill = Consideration transferred − Fair value of identifiable net assets acquired = $15,000,000 − $12,000,000 = $3,000,000. Journal entry at acquisition: Dr. Identifiable Assets (at FMV) $20,000,000 / Dr. Goodwill $3,000,000 / Cr. Identifiable Liabilities (at FMV) $8,000,000 / Cr. Cash (consideration) $15,000,000. Total debits = $20,000,000 + $3,000,000 = $23,000,000; Total credits = $8,000,000 + $15,000,000 = $23,000,000. Goodwill represents the premium paid above the fair value of identifiable net assets, it reflects expected synergies, assembled workforce, customer relationships, and other unidentifiable benefits that are not separately recognizable. Under US GAAP, goodwill from business combinations is not amortized but is tested for impairment at least annually.

• A. All $880,000 are expensed as R&D because software-for-sale costs are always expensed
• B. All $880,000 are capitalized as software development assets and amortized over the product's life
• C. Pre-feasibility costs ($200,000) and post-release maintenance ($80,000) are expensed; post-feasibility development costs ($600,000) are capitalized as software product assets and subsequently amortized
• D. Only maintenance costs ($80,000) are expensed; all development costs ($800,000) are capitalized regardless of feasibility stage

ASC 985-20 (Software to be Sold, Leased, or Marketed) three-phase treatment: (1) Pre-technological feasibility: all costs are EXPENSED as R&D. Technological feasibility is established when the entity has completed all planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet design specifications. January costs ($200,000) → EXPENSE as R&D; (2) Post-technological feasibility through release to customers: costs are CAPITALIZED as software product costs. February, September costs ($600,000) → CAPITALIZE; (3) Post-release maintenance, customer support, and minor enhancements: EXPENSE as incurred. Post-release maintenance ($80,000) → EXPENSE. The capitalized $600,000 is then amortized using the greater of (a) the ratio of current period gross revenues to the total of current and anticipated future gross revenues, or (b) straight-line over the remaining estimated economic life.

• A. Test goodwill at the entity level, combine both divisions and compare total carrying amount ($75M) to total fair value ($80M); no impairment since entity-level fair value exceeds carrying amount
• B. Division A: full quantitative test required annually regardless of qualitative assessment; Division B: impairment = $12M (full goodwill write-off because carrying amount exceeds fair value)
• C. Division B impairment = $28M (fair value of reporting unit); the entire reporting unit is written off when fair value falls below carrying amount
• D. Division A: qualitative step passes, no further testing required; Division B: quantitative test required, carrying amount ($35M) exceeds fair value ($28M); impairment = $7M (limited to goodwill of $12M); recognize $7M goodwill impairment for Division B

Correct analysis: Division A: The qualitative assessment (step zero) concluded that impairment is NOT more-likely-than-not. Under ASC 350, if the qualitative assessment passes, no quantitative test is required for that period. Division A proceeds with no impairment. Division B: Quantitative test is required (either the qualitative assessment failed, or Division B skipped the qualitative test). Carrying amount ($35M) > Fair value ($28M) → impairment exists. Impairment loss = min(Carrying amount − Fair value, Goodwill balance) = min($7M, $12M) = $7M. Journal entry for Division B: Dr. Goodwill Impairment Loss $7,000,000 / Cr. Goodwill $7,000,000. Remaining goodwill after impairment: $12M − $7M = $5M. The impairment cannot cause the goodwill balance to go negative, it is capped at the goodwill balance.