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Chapter 12: Question 3 (page 637)

Intangibles have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?

Short Answer

Expert verified

Intangibles have either a limited useful life or an indefinite useful life. Intangibles with limited life can be amortized, but intangibles with an endless life cannot be amortized.

Step by step solution

01

Meaning of Amortization

Amortization is a strategy used in accounting to reduce the book value of a loan or intangible asset over a predetermined period.

02

Amortization of Intangibles

The limited-life intangibles should be amortized over their useful life by systematic charges to expenditure.

It is not possible to amortize an intangible asset with endless life.

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Most popular questions from this chapter

(Copyright Impairment) Presented below is information related to copyrights owned by Mare Company at December 31, 2017.

Cost

\(8,600,000

Carrying amount

4,300,000

Expected future net cash flows

4,000,000

Fair value

3,200,000

Assume that Mare Company will continue to use this copyright in the future. As of December 31, 2017, the copyright is estimated to have a remaining useful life of 10 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017. The company does not use accumulated amortization accounts.
  2. Prepare the journal entry to record amortization expense for 2018 related to the copyrights.
  3. The fair value of the copyright at December 31, 2018, is \)3,400,000. Prepare the journal entry (if any) necessary to record the increase in fair value.

Question: (Correct Intangible Assets Account) Reichenbach Co., organized in 2016, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2017 and 2018.

Intangible Assets

7/1/17

8-year franchise; expiration date 6/30/25

\( 48,000

10/1/17

Advance payment on laboratory space (2-year lease)

24,000

12/31/17

Net loss for 2017 including state incorporation fee, \)1,000, and related legal fees of organizing, $5,000 (all fees incurred in 2017)

16,000

1/2/18

Patent purchased (10-year life)

84,000

3/1/18

Cost of developing a secret formula (indefinite life)

75,000

4/1/18

Goodwill purchased (indefinite life)

278,400

6/1/18

Legal fee for successful defense of patent purchased above

12,650

9/1/18

Research and development costs

160,000

Instructions

Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2018, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.)

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2015, the company expends \(325,000 on a research project, but by the end of 2015, it is impossible to determine whether any benefit will be derived from it.

  1. What account should be charged for the \)325,000, and how should it be shown in the financial statements?
  2. The project is completed in 2016, and a successful patent is obtained. The R&D costs to complete the project are \(130,000 (\)36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2016 total \(24,000. The patent has an expected useful life of 5 years. Record these costs in the journal entry form. Also, record patent amortization (full year) in 2016.
  3. In 2017, the company successfully defends the patent in extended litigation at a cost of \)47,200, thereby extending the patent life to December 31, 2024. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2017.
  4. Additional engineering and consulting costs incurred in 2017 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly鈥檚 journal entry, if necessary, to record the loss on impairment.

Raleigh Corp. has an investment with a carrying value (equity method) on its books of \(170,000 representing a 30% interest in Borg Company, which suffered a \)620,000 loss this year. How should Raleigh Corp. handle its proportionate share of Borg鈥檚 loss?
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