Intangible Assets Flashcards
What are some examples of intangible assets?
patents
goodwill
leasehold improvements
copyrights
trademarks
franchises
brand names
trade secrets
What is the definition of organizational costs?
What accounting is made of organization costs?
Professional fees and any other ordinary and necessary costs to get a business started are organizational costs. Stock issuance costs are reductions to APIC and not organizational costs.
organizational costs are expensed as incurred
What accounting is made of intangible assets?
intangible assets are capitalized and reported on the balance sheet. the cost is amortized over the useful life of the asset if it is determinable.
Goodwill can not be amortized but is checked annually for impairment
What are leasehold improvements?
Why are leasehold improvements reported as intangible assets by a lessee?
Leasehold improvements are additions or changes made by a lessee in property that is being leased.
the improvements belong to the lessor technically though because of the lease the lessee has right to make use of the improvements.
A leasehold improvements must be amortized to expense. What life is used for this amortization?
a leasehold improvement is amortized over the life of the improvement or the life of the lease whichever is shorter.
*if the lessee has the right to extend the life of the lease, this longer period is only included if the lessee is reasonably certain that the lease will be extended
What is research?
What is development?
Research is the search and discovery of new knowledge in hopes of making a potential profit.
Development is the translation of research into a plan for a profitable product.
An entity spends $200,000 for research in year 1 and another $120,000 for development.
What is the appropriate accounting?
under normal conditions, all research and development costs are expensed as incurred. therefore the entire $320,000 is reported as research and development expense.
in this way, all companies handle R&D costs in a comparable manner that is not subject to judgement or manipulation.
R&D costs are typically expensed as incurred. There is one exception to this rule, where a R&D cost is capitalized. When is this exception?
If an entity acquires a long-lived asset for R&D and this asset has alternative future uses, the asset is capitalized. However depreciation of this asset is reported as R&D expense.
If an entity acquires a long-lived asset that has no alternative future uses it is expensed as incurred as R&D expense.
An entity spends $200,000 to acquire a patent. The entity also spends $34,000 for the legal costs in connection with the patent. Finally, the entity is sued and spends another $30,000 to successfully defend the patent.
What is the capitalized cost of the patent?
all 3 of these costs are normal and necessary costs of the patent and should be capitalized for a cost of $264,000.
*if the defense of the patent was unsuccessful the entire capitalized amount and the legal fees would be expensed immediately
A computer entity is developing a software product to be sold to the public. The entity spends $300,000 to get to the point of being technologically feasible.
How is this $300,000 cost reported?
In software development for external sales purposes, the costs incurred to arrive at technological feasibility are expensed as incurred as R&D
A computer entity is developing a software product to be sold to the public. The entity spends $300,000 to get to the point of being technologically feasible.
What is meant by being technologically feasible?
the point at which the entity has a working model or at lease a program design
A computer entity is developing a software product to be sold to the public. The entity spends $300,000 to get to the point of being technologically feasible. After that the entity spends another $500,000 to take this working model and turn it into a product that can be sold.
What accounting is made of this additional $500,000?
after a software product has achieved technological feasibility, any other costs incurred to get the item to a product that can be sold are capitalized as an intangible asset
A computer entity is developing a software product to be sold to the public. The entity spends $300,000 to get to the point of being technologically feasible. After that the entity spends another $500,000 to take this working model and turn it into a product that can be sold. This $500,000 is capitalized as an intangible asset.
What happens to this asset?
the asset is amortized to expense by either the straight-line method or the percentage of sales method, whichever gives the largest expense each year
A computer entity is developing a software product to be sold to the public. The entity spends $300,000 to get to the point of being technologically feasible. After that the entity spends another $500,000 to take this working model and turn it into a product that can be sold. This $500,000 is capitalized as an intangible asset. The entity expects to sell 100,000 copies of this software over the next 5 years. In year 1, the entity sells 32,000 copies.
How much amortization should be recognized in year 1?
in year 1 the SL method would be 1/5 x $500,000 or $100,000
in year 1 the % of sales method would be 32,000/100,000 x $500,000 or $160,000
because the % of sales method is larger that is the amount of amortization expense to be recognized
