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Chapter 12: Question 6 (page 637)

What are factors to be considered in estimating the useful life of an intangible asset?

Short Answer

Expert verified

The useful life of identical assets varies for each user and is determined by the asset鈥檚 age, frequency of usage, business climate, and asset repair strategy. Expected technology advancements, legislative changes, and economic changes are all variables that impact an asset鈥檚 useful life.

Step by step solution

01

Definition of Intangible asset

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

Factors to be considered in estimating the useful life of an intangible asset

1.) The entity鈥檚 anticipated use of the asset.

2.) The predicted useful life of another asset or a group of assets could be linked to the intangible asset鈥檚 useful life.

3.) Any legal, regulatory, or contractual constraints that might limit the usable life of the item.

4.) Any legal, regulatory, or contractual arrangements that allow the asset鈥檚 legal, contractual life to be renewed or extended without incurring significant costs.

5.) Obsolescence, demand, competitiveness, and other economic considerations.

6.) The amount of maintenance necessary to get the asset鈥檚 estimated future cash flows.

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Most popular questions from this chapter

Question: (Accounting for R&D Costs) Price Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2016, the company expends \(325,000 on a research project, but by the end of 2016 it is impossible to determine whether any benefit will be derived from it.

Instructions

  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 2017, and a successful patent is obtained. The R&D costs to complete the project are \(110,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2017 total \)16,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2017.
  3. In 2018, the company successfully defends the patent in extended litigation at a cost of \(47,200, thereby extending the patent life to December 31, 2025. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2018.
  4. Additional engineering and consulting costs incurred in 2018 required to advance the design of a product to the manufacturing stage total \)60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.

Joni Hyde Inc. has the following amounts reported in its general ledger at the end of the current year.

Organization costs $24,000

Trademarks 15,000

Discount on bonds payable 35,000

Deposits with advertising agency for ads to promote goodwill of company 10,000

Excess of cost over fair value of net identifiable assets of acquired subsidiary 75,000

Cost of equipment acquired for research and development projects; the equipment has an alternative future use 90,000

Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years 80,000

Instructions

(a) On the basis of the information above, compute the total amount to be reported by Hyde for intangible assets on its balance sheet at year-end.

(b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.

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.

Hiram Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received from these investments subsequent to the date of investment?

Question: (Accounting for Patents) Tones Industries has the following patents on its December 31, 2016, balance sheet.

Patent Item

Initial Cost

Date Acquired

Useful Life at Date Acquired

Patent A

\(30,600

3/1/13

17 years

Patent B

\)15,000

7/1/14

10 years

Patent C

\(14,400

9/1/15

4 years

The following events occurred during the year ended December 31, 2017.

  1. Research and development costs of \)245,700 were incurred during the year.
  2. Patent D was purchased on July 1 for \(36,480. This patent has a useful life of 9陆 years.
  3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B鈥檚 value may have occurred at December 31, 2017. The controller for Tones estimates the expected future cash flows from Patent B will be as follows.

    Year

    Expected Future Cash Flows

    2018

    \)2,000

    2019

    2,000

    2020

    2,000

  4. The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

    Instructions

    1. Compute the total carrying amount of Tones鈥� patents on its December 31, 2016, balance sheet.
    2. Compute the total carrying amount of Tones鈥� patents on its December 31, 2017, balance sheet.
See all solutions

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