Multiple Choice
Which cycle do companies use to evaluate and improve financial performance, particularly when preparing adjusting journal entries for prepaid expenses?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
In the context of adjusting journal entries and prepaid expenses, in-process research and development (IPR&D) acquired in a business combination is:
A
Expensed immediately as incurred.
B
Deferred as a prepaid expense and amortized over its useful life.
C
Recorded as goodwill and not separately identified.
D
Recognized as an intangible asset at fair value on the acquisition date.
Verified step by step guidance1
Understand the concept of in-process research and development (IPR&D): IPR&D refers to research and development projects that are incomplete at the time of acquisition in a business combination. These projects have potential future economic benefits.
Review the accounting treatment for IPR&D: According to accounting standards, IPR&D acquired in a business combination is recognized as an intangible asset at its fair value on the acquisition date. This is because it meets the criteria for recognition as an asset, including probable future economic benefits and reliable measurement.
Clarify why IPR&D is not expensed immediately: Unlike regular R&D expenses, IPR&D acquired in a business combination is treated differently because it is part of the acquisition cost and has measurable fair value. Expensing it immediately would not align with the principles of recognizing assets in a business combination.
Explain why IPR&D is not deferred as a prepaid expense: Prepaid expenses are typically short-term assets that represent payments made in advance for goods or services. IPR&D does not fit this definition, as it is an intangible asset with potential long-term benefits.
Discuss why IPR&D is not recorded as goodwill: Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Since IPR&D can be separately identified and measured at fair value, it is recognized as an intangible asset rather than being included in goodwill.
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