Course: Financial Accounting

Session: 8

 Instructor: M Faisal
 Course: Financial Accounting
 Program: BBA
 Semester: 2
 Topic: Ch 9: Plant & Intangible Assets (Cont’d)
Ch 9: Plant & Intangible Assets

1
Session Contents Activities
#
Class activity1: Discussion / Question Answer on
Ø Intangible assets learning outcomes of the pre-reading assignment.
Ø Characteristics
Ø Operating expenses
Class activity2: Concepts will be built through
versus intangible assets
lecture & discussion.
Ø Amortization
Ø Patents
Ø Trademarks and trade Class activity3: Handout’s End of the Chapter
8 names practice questions –
Ø Franchises Pr 9.5 pg 404-5, BE9-10 pg 484, E9-13 pg 488,
Ø Copyrights P9-4A pg 490-491
Ø Other intangibles and Home assignment:
deferred charges
Revise the lecture & problem solved in the class.
§ Research and
Read the topic due for discussion in the next
development (R & D)
class.
costs
P9-4B pg 493
 Intangible Assets

 Intangible assets
 are assets that are used in the operation of the
business
 but that have no physical substance &
 noncurrent
 E.g.: Patents, Trademarks, & Goodwill

 Is A/R an Intangible Assets

 Since A/R is a current asset & so it is not an
intangible asset
The basis of valuation - Intangible
Assets
 Intangible Assets[IT] appear in b/s
 at their COST,
 regardless of their value to the company
 IT Assets are listed only
 if significant cost are incurred in their acquisition or
development
 If the cost is insignificant,
 they are treated as revenue expenditures or ordinary
expenses
 Operating expenses versus intangible assets

class
the class
 For an expenditure to qualify as an Intangible
Assets

in the
 there must be reasonable evidence of future benefits
 Many expenditures offer some prospects of yielding

done in
benefits in subsequent years,

to done
 but the existence & life span of these benefits are so
uncertain
 most companies treat these expenditures as operating expense

404-5 to
 E.g.

pg 404-5
 • The expenditures for intensive advertising
campaigns to introduce new products
 • The expense of training employees to work with new

9.5 pg
types of machinery or office equipment

Pr 9.5
Pr
 a. Operating expense. Although the training of employees probably has some
benefit extending beyond the current period, the number of periods benefited
Pr 9-5

is highly uncertain. Therefore, current accounting practice is to expense

routine training costs.
b. Intangible asset. Goodwill represents the present value of future earnings in
excess of what is considered normal. The goodwill associated with Black’s
purchase of the vinyl flooring company should not be amortized, but is subject
to evaluation for impairment in value.
c. Operating expense. Because of the great uncertainty surrounding the
potential benefits of R&D programs, research and development costs should
be charged to expense in the period in which these costs are incurred.
Although this accounting treatment is controversial, it at least has the benefit
of reducing the number of alternative accounting practices previously in use,
thereby increasing the comparability of financial statements.
d. Intangible asset. A patent grants its owner the exclusive right to produce a
particular product. If the patent has significant cost, this cost should be
regarded as an intangible asset and expensed over the period of time that
ownership of the patent will contribute to revenue. In this case, revenue is
expected to be earned only over the 6-year period during which the product
will be produced and sold.
e. Operating expense. Advertising costs are regarded as operating expense
because of the difficulty in objectively determining the existence or life of any
future benefit.
 Amortization
 It is the systematic write-off of the cost of an
intangible asset to expense over its useful life
 Amortization of IT Assets
 Similar to Depreciation of Tangible Assets
 Entry
Amortization Expense ###
Intangible Asset A/c ###
  No theoretical objection on crediting  an accumulated
amortization account rather than IT Asset A/c, but this method is
seldom encountered in practice
 Amortization
 It is difficult to estimate the useful life of an
intangible (such as trademark)
 it is probable that such an asset will not
contribute to future earnings on a permanent
basis
 The cost of the IT asset should be deducted from
revenue during the years in which it may be
expected to aid in producing revenue
 The SLM normally is used for amortizing IT
assets
 Patents
 It is an exclusive right granted by Federal Govt
for manufacture, use & sale of a particular
product
 Journal entry
PATENTS……………100,000
CASH………………………100,000
( To record the purchase of patent from inventor
after the expire of 5 years of legal life but with 4
years of useful life)
 Patents are granted for a period of 17 years
 Patents
 Amortization period should not be > 17 YRS
 If the patent is likely to lose its usefulness in
< 17 years, so amortization should be based
on the shorter estimated useful life
 E.g.
Amortization Exp: Patents……..25,000
Patents……………………….25,000
To amortize cost of patent on Straight line
basis over an estimated life of 4 years
BRIEF EXERCISE 9-10
 
(a) Amortization Exp ($156,000 ÷ 6)26,000
Patent
26,000
 
(b) Intangible Assets
Patent (Net of $26,000 of amortization)
$130,000
 Trademarks and trade
names
 It is a name, symbol, or design that identifies
It is a name, symbol, or design that identifies
a product or group of products
 A permanent exclusive right to use a
trademark, brand name, or commercial
symbol may be obtained by registering it with
the federal govt
 If a trademark or brand name is purchased at
a substantial cost
 then such cost is capitalized &
 amortized over a period NOT EXCEEDING 40 yrs
 Trademarks and trade
names
 If the trademark is discontinued or its
If the trademark is discontinued or its
contribution to earnings become doubtful,
 any unamortized cost should be written off
immediately
 Franchises
 It is a right granted by a co or a governmental
unit to conduct a certain type of business in
a specific geographical area

 E.g.
 The right to operate a KFC restaurant in a specific
neighborhood
 Franchises
 THE COST OF FRANCHISE
 Small
 immediately charged to expense or amortized over a
short period such as 5 yrs

 Material
 amortize it over the life of the franchise with amortization
period not > 40 yrs
 Copyrights
 It is an exclusive right granted by federal
govt to protect the production & sale of
literary or artistic materials for the life of the
creator plus 50 years

 Cost of Copyrights
 Minor –
 charged to expense when paid
 Material -
 capitalized & amortized over the useful life
Other intangibles and deferred
charges
 Moving costs, plant rearrangement costs,
formulas, processes, name lists, & film rights
 Some companies include these items under the title
of Deferred Charges
 Expenditures that will provide benefits beyond the current
year & that will be written off to expense over their useful
economic lives
 It is also a common practice to combine these
items under the heading of Other Assets, which
is listed at the bottom of the b/s
Research and development (R & D)
costs
 In past,
 some companies treated all R & D costs
 expenses in the year incurred
 some companies in the same industry recorded these
costs
 as intangible assets to be amortized over future
years

 FASB ruled that all the R & D expenditures

should be charged to expense when incurred
 FA-S#8-Class Activity3

End of the Chapter practice question(s)

 Pr 9.5 pg
 BE9-10 pg 484
 E9-13 pg 488,
 P9-4A pg 490-491
EXERCISE 9-13
 
Dec. 31 Amortization Expense 20,000
Copyright ($120,000 X 1/6)
20,000
 
31 Amortization Expense 11,250
Patent ($54,000 X 1/4 X 10/12)
11,250
 
The goodwill would not require an adjusting entry
because it has an indefi­nite life.
PROBLEM 9-4A

(a) Jan. 2 Patents 46,800

Cash 46,800
 
Jan.– R & D Expense 230,000
June Cash 230,000
 
July 1 Patents 20,000
Cash 20,000
 
Sept. 1 Advertising Expense 40,000
Cash 40,000
 
Oct. 1 Copyright 200,000
Cash 200,000
 
 PROBLEM 9-4A

(b) Dec. 31 Amortization Expense 11,700

Patents 11,700
[($60,000 X 1/10) + ($46,800 X 1/9) + ($20,000 X 1/20 X 6/12)]

31 Amortization Expense 4,600

Copyrights 4,600
[($36,000 X 1/10) + ($200,000 X1/50 X 3/12)]
 PROBLEM 9-4A

(c) Intangible Assets

Patents ($126,800 cost less $17,700 amortization) (1) $109,100
Copyrights ($236,000 cost less $29,800 amortization)(2) 206,200
Total intangible assets $315,300

(1) Cost ($60,000 + $46,800 + $20,000); amortization ($6,000 + $11,700).

(2) Cost ($36,000 + $200,000); amortization ($25,200 + $4,600).
 
PROBLEM 9-4A

(d) The intangible assets of Cepeda Corporation consist

of two patents and two copyrights. One patent with a cost
of $60,000 is being amor­tized over 10 years. In addition,
legal costs of $46,800 incurred in the suc­cessful defense
of this patent are being amortized over the remaining
useful life, 9 years. The other patent with a cost of $20,000
is being amor­tized over 20 years. A copyright with a cost
of $36,000 is being amortized over 10 years; the other
copyright with a cost of $200,000 is being amortized over
50 years.
Questions & Answers