INTANGIBLE ASSETS
Study Objective 8
• Intangible assets
– Rights, privileges, and competitive advantages
that result from the ownership of long lived assets
that do not possess physical substance
– May arise from government grants, acquisition of
another business, and private monopolistic
arrangements
ACCOUNTING FOR INTANGIBLE
ASSETS
• In general, accounting for intangible
assets parallels the accounting for
plant assets.
• Intangible assets are:
1 recorded at cost
2 written off over useful life in a
rational and systematic manner
3 at disposal, book value is eliminated
and gain or loss, if any, is recorded
ACCOUNTING FOR INTANGIBLE
ASSETS
STUDY OBJECTIVE 8
• Key differences between accounting for
intangible assets and accounting for plant
assets include:
– The systematic write-off of an intangible asset is
referred to as amortization
• To record amortization
– Debit Amortization Expense and credit the
specific intangible asset
– Intangible assets typically amortized on a
straight-line basis
PATENTS
• A patent
– exclusive right issued by the Patent Office
– manufacture, sell, or otherwise control an invention
for a period of 20 years from the date of grant
• Cost of a patent
– initial cost is the cash or cash equivalent price paid
to acquire the patent
– legal costs – amount an owner incurs in successfully
defending a patent are added to the Patent
account and amortized over the remaining useful
life of the patent
– should be amortized over its 20-year legal life or its
useful life, whichever is shorter.
RECORDING PATENTS
National Labs purchases a patent at a cost of $60,000. If the
useful life of the patent is 8 years, the annual amortization
expense is $7,500 ($60,000 ÷ 8).
Amortization Expense is classified as an operating expense in the
income statement. The entry to record the annual patent
amortization is:
Am ortization Expense 7,500
Patents 7,500
COPYRIGHTS
• Copyrights
– grants from the federal government
– gives the owner the exclusive right to reproduce
and sell an artistic or published work
• Copyrights extend for the life of the creator
plus 70 years.
• The cost of a copyright is the cost of
acquiring and defending it.
TRADEMARKS AND
TRADE NAMES
• A trademark or trade name
– word, phrase, jingle or symbol identifying a
particular enterprise or product
• Trademark or trade name purchased
– the cost is purchase price
• Trademark developed by a company
– the cost includes attorney’s fees, registration
fees, design costs and successful legal defense
fees
FRANCHISES
AND LICENSES
• Franchise
– contractual arrangement under which the
franchisor grants the franchisee the right to sell
certain products, render specific services, or use
certain trademarks or trade names, usually
restricted to a designated geographical area
• Another type of franchise, commonly referred
to as a license or permit
– entered into between a governmental body and a
business enterprise and permits the enterprise to
use public property in performing its services.
GOODWILL
• Goodwill
– value of all favorable attributes that relate to a
business enterprise
– attributes may include exceptional management,
desirable location, good customer relations and
skilled employees
– cannot be sold individually in the marketplace; it
can be identified only with the business as a whole
GOODWILL
• Goodwill
– recorded only when a transaction involves the
purchase of an entire business
– excess of cost over the fair market value of the
net assets (assets less liabilities) acquired
– not amortized
– reported under Intangible Assets
RESEARCH AND
DEVELOPMENT COSTS
• Research and development costs
– pertain to expenditures incurred to develop
new products and processes
• These costs are not intangible costs
– recorded as an expense when incurred
