Intangibles, R&D, Software, and Other Assets Flashcards
What is peculiar about recording patent costs?
Cost of competing patent acquired to protect existing patent is capitalized
Cost to successfully legally defend patent is capitalized
How is a franchise recorded?
Cannot be internally developed
Capitalize all significant costs, including PV of any future cash payments
Periodic service fees are operating expense, not capitalized
What is a leasehold?
A right to use rented properties
Prepaid rent is an intangible asset until it is expensed
How should leasehold improvements be recorded?
Capitalized and amortized over their estimated useful life or the remaining lease term, whichever is shorter (if the lessee intends to renew the lease, that is included in the lease term)
What does a copyright cover?
Forbids others’ reproduction of the owner’s written works, designs, and literary productions
Copyright period lasts 70 years beyond owner’s life, but should be amortized over its useful life
How are intangible assets initially recorded?
External acquisition costs are measured at fair value (proportioned to relative fair value in group purchases)
Internally developed costs are expensed as incurred, not capitalized
How should intangible assets with finite useful lives be amortized?
As best reflects how the asset will be used up
If this cannot be reliably determined, then straight-line method should be used
Salvage value should be assumed as zero unless there is evidence otherwise
How often should the remaining useful life of an intangible asset be evaluated?
Every reporting period
Assets with indefinite useful lives are also evaluated
How should intangible assets with indefinite useful lives be accounted for?
Should be tested at least annually for impairment
If determined to have a finite life, asset should be tested for impairment and then amortized
How should assets obtained for an R&D project be recorded?
If no alternative use, they should be expensed as incurred, like all other R&D costs
If alternative future uses, they should be recorded as assets and amortized with charges to R&D expense
How are contractually reimbursable R&D costs recorded?
Not expensed as R&D
To what do “computer software” accounting rules apply?
Either (1) computer software to be sold/leased as a separate product or (2) software to be sold/leased as an essential (non-incidental) part of another product
Which internal costs in developing software are expensed as R&D?
All expenses up to the point of technological feasibility
How are costs after technological feasibility reported?
Costs of producing product masters (including coding and testing) are capitalized
For software which is part of another product, costs are not capitalized until all R&D for the other components of the product are completed
Which other costs may be capitalized for software?
Indirect costs (e.g. overhead for programmers’ facilities) can be, but not general & administrative expenses, which must be expensed for the period in which they’re incurred
When does capitalization end for software costs?
When the product is available for general release to customers
Maintenance and customer service are expensed
What is the accounting guidance for software that is purchased?
Generally the same – e.g. if the software already has technological feasibility when purchased, then the whole cost is capitalized; if it still needs developing, then it is expensed
Which software costs are inventoriable?
Costs for (a) duplicating the software, documentation, and training materials from product masters and (b) physically packaging the product are capitalized as inventory on a unit-specific basis
How much of the capitalized software costs are amortized annually?
Greater of (1) the ratio of current gross revenues for the product to total estimated revenues and (2) straight-line method for remaining useful life
Amortization begins when the product is available for release to customers
What is the net realizable value test for computer software?
At each balance sheet date, unamortized capitalized costs for software products are compared to their NRV and written off to a lower value if applicable
What is the net realizable value for computer software?
Estimated future gross revenues minus estimated future costs of completing and disposing of the product, including maintenance and customer support costs
What is the proper accounting guidance for computer software developed or obtained for internal use?
Generally the same as software for sale, except that capitalization ends when the project is “substantially complete and ready for its intended use”
Training and maintenance costs are expensed as incurred
There is no NRV, so capitalized costs are amortized over their useful life without any write-offs
What are two different ways to record prepaid expenses as journal entries?
- Date of payment
Debit: Prepaid expense
Credit: Cash
Year-end
Debit: Expense
Credit: Prepaid expense
- Date of payment
Debit: Expense
Credit: Cash
Year-end
Debit: Prepaid expense
Credit: Expense
How should prepaid expenses be classified on the balance sheet?
Current asset if it will be paid in 12 months, otherwise noncurrent asset
This is the case even for companies with operating cycles under twelve months
How should the cash surrender value for life insurance be classified?
Noncurrent asset – among “Investments and Funds”
How do cash values for life insurance affect the reported life insurance expense?
Expense = (premium) - (increase in cash value + dividends received)
How does a leasehold improvement salvage value affect its amortization?
It doesn’t. The amortization is not depreciation, so the salvage value is ignored. Amortization is “to zero.”
How should costs of developing, maintaining, or restoring goodwill be recorded?
Expensed when incurred, not capitalized
If a company tests for goodwill and determines that FV is higher than carrying value, how is it reported?
No increase in goodwill – there are never any gains on goodwill by remeasurement to FV, only losses
If assets are acquired solely for R&D, but partially for future R&D projects, how is it recorded?
It is expensed to R&D as it is consumed for R&D
When determining amortization for a bond, how does the NRV test fit in?
Intangible assets should be written down at year-end from unamortized cost to NRV – so first amortize the asset and then compare it, to determine whether to write it down
