Intangible assets have no physical substance, however, they are sometimes a companies most valuable asset. Some examples of intangible assets are patents, copywrites, franchises and goodwill.
E12-1 (Classification Issues—Intangibles) Presented below is a list of items that could be included in the intangible assets section of the balance sheet.
1. Investment in a subsidiary company. Balance Sheet under long term investments
2. Timberland. Balance sheet under property plant and equipment
3. Cost of engineering activity required to advance the design of a product to the manufacturing stage. Expensed to R&D. Companies generally only capitalize direct expenses as intangible assets.
4. Lease prepayment (6 months’ rent paid in advance). Recorded on the balance sheet as a current asset.
5. Cost of equipment obtained. Recorded under property, Plant and Equipment on the balance sheet.
6. Cost of searching for applications of new research findings. Expensed to R&D.
7. Costs incurred in the formation of a corporation. Expense
8. Operating losses incurred in the start-up of a business. Operating Loss
9. Training costs incurred in start-up of new operation. Training Expense
10. Purchase cost of a franchise. Intangible asset
11. Goodwill generated internally. Not Recorded (Goodwill is only recorded upon the sale of a business)
12. Cost of testing in search for product alternatives. R&D
13. Goodwill acquired in the purchase of a business. Intangible Asset
14. Cost of developing a patent. R&D
15. Cost of purchasing a patent from an inventor. Intangible Asset
16. Legal costs incurred in securing a patent. Intangible Asset
17. Unrecovered costs of a successful legal suit to protect the patent. Intangible Asset
18. Cost of conceptual formulation of possible product alternatives. Expensed to R&D
19. Cost of purchasing a copyright. Intangible Asset
20. Research and development costs. Expensed to R&D
21. Long-term receivables. Accounts Receivable
22. Cost of developing a trademark. Expense
23. Cost of purchasing a trademark. Intangible Asset
E12-4 (Intangible Amortization) Presented below is selected information for Palmiero Company.
- 1. Palmiero purchased a patent from Vania Co. for $1,500,000 on January 1, 2010. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2020. During 2012, Palmiero determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2012?
When there is a change in the useful life of an intangible asset, the remaining carrying value is amortized over the new remaining number of years.
In this case, the first year amortization would have been for 10 years because the change in useful life was not known for the December 31, 2011 year end.
On December 31, 2011 the amount expensed was 1,500,000/10 = 150,000 with 1,350,000 remaining and reported on the balance sheet.
On December 31, 2012 the amount expensed was 1,350,000/5=270,000 with 1,080,000 remaining and reported on the balance sheet.
- 2. Palmiero bought a franchise from Dougherty Co. on January 1, 2011, for $350,000. The carrying amount of the franchise on Dougherty’s books on January 1, 2011, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Palmiero must enter a competitive bidding at the end of 2020, it is unlikely that the franchise will be retained beyond 2020. What amount should be amortized for the year ended December 31, 2012?
The amortization expense is 500,000/8=62,500, since there are now only 8 years to amortize on.
- 3. On January 1, 2010, Palmiero incurred organization costs of $275,000. What amount of organization expense should be reported in 2012?
Organizational costs should be expensed in the year they are incurred. The amount of organizational cost for 2012 is 0.
- 4. Palmiero purchased the license for distribution of a popular consumer product on January 1, 2012, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Palmiero can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2012?
The amount amortized should be the cost of the license divided by the term of the license.
150,000/5 = 30,000
E12-12 (Accounting for Goodwill) Fred Graf, owner of Graf Interiors, is negotiating for the purchase of Terrell Galleries. The balance sheet of Terrell is given in an abbreviated form below.
Graf and Terrell agree that:
1. Land is undervalued by $50,000.
2. Equipment is overvalued by $5,000.
Terrell agrees to sell the gallery to Graf for $380,000.
Prepare the entry to record the purchase of Terrell Galleries on Graf’s books.
Book Value of Terrell Galleries 575,000
Adjustments to fair value
Equipment (5,000) 45,000
Fair market Value 530,000
Less: Total Liabilities 350,000
Fair Market Value of net assets 170,000
Selling Price 380,000
Fair Market Value of Net Assets 180,000
Accounts Payable 50,000
Notes Payable 300,000