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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

(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.

Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have debit balances.

Cable television franchises

Film contract rights

Music copyrights

Customer lists

Research and development costs

Prepaid expenses

Goodwill

Covenants not to compete

Cash

Brand names

Discount on notes payable

Notes receivable

Accounts receivable

Investments in affiliated companies

Property, plant, and equipment

Organization costs

Internet domain name

Land

Instructions:

Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for \(13,200 (Fairbanks does not have significant influence). During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks鈥� journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustmentaccount.)

Indicate how unrealized holding gains and losses should be reported for debt investments classified as trading, available-for-sale, and held-to-maturity.

If intangibles are acquired for stock, how is the cost of the intangible determined?
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