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Chapter 12: Question 1 (page 637)

What are the two main characteristics of intangible assets?

Short Answer

Expert verified

It is not physical, meaning it exists as a legal authority and is distinguishable from other assets.

Step by step solution

01

Definition of intangible assets

An identified non-monetary item with no physical substance is known as an intangible asset. It is identifiable when an asset is separable or comes from contractual or other legal rights.

02

Characteristics

An intangible asset has two key characteristics: it is not physical, meaning it exists as a legal authority and is distinguishable from other assets.

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Most popular questions from this chapter

Merck and Johnson & Johnson

Question: Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and \(200 million to develop its 1-DAY ACUVUE contact lenses. Below are some basic data compiled from the financial statements of these two companies.

(all dollars in millions)

Johnson & Johnson

Merck

Total assets

\)53,317

\(42,573

Total revenue

47,348

22,939

Net income

8,509

5,813

Research and development expense

5,203

4,010

Intangible assets

11,842

2,765

Instructions

  1. What kinds of intangible assets might a healthcare products company have? Does the composition of these intangibles matter to investors鈥攖hat is, would it be perceived differently if all of Merck鈥檚 intangibles were goodwill than if all of its intangibles were patents?
  2. Suppose the president of Merck has come to you for advice. He has noted that by eliminating research and development expenditures the company could have reported \)4 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop. He says shareholders are eager for higher returns, so he is considering eliminating research and development expenditures for at least a couple of years. What would you advise?
  3. The notes to Merck鈥檚 financial statements note that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on a company鈥檚 books?

(Investment Classifications)For the following investments, identify whether they are:

1. Trading debt securities.

2. Available-for-sale debt securities.

3. Held-to-maturity debt securities.

4. None of the above.

Each case is independent of the other.

(a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases,

which is expected next month, it will be sold.

(b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30%

of its outstanding stock.

(c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.

(d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money

has been tight recently and they may need to be sold.

(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

(f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project

planned 10 years from now.

Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders鈥� equity and income.

In what situation will the unrealized holding gain or loss on inventory be reported in income?

Question: Why are held-to-maturity investments applicable only to debt securities?
See all solutions

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