Chapter 4 Intangible Assets
By Samson Worku
(Ph.D. Candidate, MBA, MA, BA, [Link]., COC certified)
JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 1
Study Objectives
1. Define intangible assets
2. Determine the cost of intangible assets
3. Calculate the amortization of intangible assets
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JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 2
Defining Intangible Assets
Intangible assets are assets that have no physical
substance (they can neither been seen or touched).
Examples of intangible assets include:
Patent
Copyrights
Goodwill
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Cost of Intangible Assets
Intangible assets are recorded at the purchase price plus any
other fees necessary for their acquisition, such as the:
broker’s fees
legal fees
government registration fees
Intangible assets can be divided into two broad categories:
those with limited lives and those with indefinite or perpetual
life.
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Example:
Company A purchases a patent from Company B fpr
$30,000 and pays a broker’s fee and legal fee of $500 and
$1,000.
Required:
Determine the cost of the intangible asset and journalize
the purchase of the intangible.
Solution:
Patent ………………………… 31,500
Cash ……………………….. 31,500
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Amortization of Intangible Assets
The wearing down of intangible assets is referred as
amortization.
Intangible assets with limited lives should be amortized over
their economic/useful life.
For intangible assets that require amortization the custom is
to use the straight line method, although the units of activity
method may be used as well.
This is accomplished by via an entry debiting Amortization
Expense and crediting Accumulated Amortization.
Example:
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Green Company purchases a patent from Brown
Corporation for a price of $10,000 and incurs legal fee
consulting fees related to the purchase in the amount of
$4,000 and $6,000 respectively. The patent’s remaining
legal life is 15 years, but because of market competition,
it useful life is estimated to be only 10 years.
Required:
(a) Prepare the entry for the patent acquisition.
(b) Prepare the amount of amortization.
JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 7
Financial Statement Presentation
On the balance sheet the Patent should be presented as
follows:
Patent……………………….….. $20,000
Less: Accumulated Amortization ……. 2,000
Net Asset …………………………… $18,000
On the income statement the amortization expense will be
deducted from sales to determine income for the period.
JIGDAN COLLEGE-DEPARTMENT OF ACCOUNTING AND FINANCE 8
Activity
Problem 1
Company C purchases a Patent for $50,000 with a remaing life of 17
years. One year after the purchase it incurs a $10,000 legal fee in
successfully defending the Patent in court. Required: Prepare the
necessary entry for:
(a) Acquisition of the Patent
(b) The amortization for the first year
(c) The $10,000 legal fee
(d) The amortization for year 2 through 17
Problem 2
Assume the Same information as in problem 1, except that the patent
defense is unsuccessful. Prepare the entries for parts c and d.
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