SLN ch 12 # 1

School: University of Wisconsin, River Falls - Course: ACCT 321 - Subject: Accounting

SLN - Ch 12 # 1 - Intangible Assets Intangible assets: a)Lack physical substance b)Are NOT financial instruments c)Normally classified as long-term assets d)Can be either purchased or created internally e)Can have either limited or indefinite life Common types of intangible assets: Patents Copyrights Franchises or licenses Trademarks or trade names Goodwill Valuation: Purchased Intangibles: Capitalize the cost Includes all costs to make the asset ready for its intended use (e.g., purchase price, legal fees, other incidental expenses) What does it mean to Capitalize an asset? e.g., imagine you want to capitalize the purchase price of a Patent. Capitalizing something just means to record it as an asset on the balance sheet. Dr. the asset (Patent) Cr. Cash (or whatever method you used to purchase the patent) Intangibles created internally: Generally expensed & recorded at cost -EXCEPTcapitalize legal costs. Amortization: The way we allocate the cost of an intangible asset - essentially the same thing as depreciation, but its' for intangible assets. Limited Life Intangibles: Companies should evaluate limited-life intangibles for impairment. Amortize to expense over useful life Amortization expense = (cost - residual value)/ useful life. Use the following journal entry to record amortization: Dr. Amortization expense Cr. Accumulated amortization (or you can credit the asset itself, for example - Cr. Patent) Indefinite-life Intangibles: No amortization. No foreseeable limit on time the asset is expected to provide cash flows. Must test indefinite-life intangibles for impairment at least annually.

Summary of Amortization of Intangible assets (Illustration 12-1 in your textbook): Manner Acquired: Type of Intangible:Purchased: Internally Created:Amortization:Impairment Test: Limited-lifeCapitalizeExpense*Over useful-lifeRecoverability test and then Fair value test Indefinite lifeCapitalizeExpense*Do not amortizeFair value test Only *Except for direct costs such as legal costs. Major Categories of Intangible assets: 1.Marketing-related - e.g., Trademarks or trade names a.In the United States trademarks or trade names have legal protection for indefinite number of 10 year renewal periods. 2.Customer-related - e.g., Customer lists 3.Artistic-related - e.g., Plays, and literary works a.Copyright granted for the life of the creator plus 70 years. 4.Contract-related - e.g., Franchise and licensing agreements a.Limited or unlimited life 5.Technology-related - e.g., Patented technology a.Patent gives holder exclusive use for 20 years. 6.Goodwill In general, capitalize costs of acquiring (and defending patents), ifdefinite life, amortize over useful life or legal life, whichever is shorter.For patents - expense any R&D costs in developing a patent. Cost subsequent to acquisition Legal cost to defend your patent oIf successful Capitalize oIf not successful Expense oCheck for impairment In class example 1 - acquisition of a customer related intangible & recording amortization: Green Market Inc. acquires the customer list of a large newspaper for $6,000,000 on January 1, 2017. Green Market expects to benefit from the information evenly over a three-year period. Record the purchase of the customer list and the amortization of the customer list at the end of each year. Jan 1, 2017Dr. Customer list6,000,000 Cr. Cash6,000,000 12/31/17Dr. Amortization exp. 2,000,000 Cr. Customer list2,000,000(or accumulated amortization) 12/31/18Dr. Amortization exp. 2,000,000 Cr. Customer list2,000,000 12/31/19Dr. Amortization exp. 2,000,000