Chapter
12-1
CHAPTER
INTANGIBLE
12
ASSETS
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
12-2
Learning Objectives
Learning Objectives
1.
Describe the characteristics of intangible assets.
2.
Identify the costs to include in the initial valuation of intangible assets.
3.
Explain the procedure for amortizing intangible assets.
4.
Describe the types of intangible assets.
5.
Explain the conceptual issues related to goodwill.
6.
Describe the accounting procedures for recording goodwill.
7.
Explain the accounting issues related to intangibleasset impairments.
8.
Identify the conceptual issues related to research and development costs.
9.
Describe the accounting for research and development and similar costs.
10.
Indicate the presentation of intangible assets and related items.
Chapter
12-3
Intangible Assets
Intangible Assets
Intangible Asset
Issues
Types of
Intangibles
Impairment of
Intangibles
Characteristic
s
Valuation
Marketingrelated
Customerrelated
Artisticrelated
Contractrelated
Technologyrelated
Goodwill
Limited-life
intangibles
Indefinite-life
intangibles
other than
goodwill
Goodwill
Amortization
Chapter
12-4
Summary
Research and
Development
Costs
Identifying
R&D
Accounting for
R&D
Similar costs
Conceptual
questions
Presentation of
Intangibles and
Related Items
Intangible
assets
R&D costs
Intangible Asset Issues
Intangible Asset Issues
Characteristics
Two Main Characteristics:
(1)
They lack physical existence.
(2)
They are not financial instruments.
Normally classified as longterm asset.
Common types of intangibles:
Patents
Trademarks or trade names
Copyrights
Goodwill
Franchises or licenses
Chapter
12-5
LO 1 Describe the characteristics of intangible assets.
Intangible Asset Issues
Intangible Asset Issues
Valuation
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangible asset ready for its
intended use.
Internally Created Intangibles:
Generally expensed.
Only capitalize direct costs incurred in developing the intangible, such as
legal costs.
Chapter
12-6
LO 2 Identify the costs to include in the initial valuation of intangible assets.
Intangible Asset Issues
Intangible Asset Issues
Amortization of Intangibles
LimitedLife Intangibles:
Amortize to expense.
Credit asset account or accumulated amortization.
IndefiniteLife Intangibles:
No foreseeable limit on time the asset is expected to provide cash flows.
No amortization.
Chapter
12-7
LO 3 Explain the procedure for amortizing intangible assets.
Intangible Asset Issues
Intangible Asset Issues
Accounting for Intangibles
Illustration 12-1
Chapter
12-8
LO 3 Explain the procedure for amortizing intangible assets.
Types of Intangibles
Types of Intangibles
Six Major Categories:
(1) Marketingrelated.
(2) Customerrelated.
(3) Artisticrelated.
(4) Contractrelated.
(5) Technologyrelated.
(6) Goodwill.
Chapter
12-9
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
MarketingRelated Intangible Assets
Examples are:
trademarks or trade names, newspaper mastheads, Internet
domain names, and noncompetition agreements.
Trademark or trade name has legal protection for indefinite number of
10 year renewal periods.
Capitalize acquisition costs.
No amortization.
Chapter
12-10
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
CustomerRelated Intangible Assets
Examples are:
customer lists, order or production backlogs, and both contractual
and noncontractual customer relationships.
Capitalize acquisition costs.
Amortized to expense over useful life.
Chapter
12-11
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Illustration: Assume that Green Market Inc. acquires the customer list of a
large newspaper for $6,000,000 on January 1, 2010. Green Market
expects to benefit from the information evenly over a threeyear period.
Record the purchase of the customer list and the amortization of the
customer list at the end of each year.
Jan. 1
Customer List
6,000,000
Cash
Dec. 31
2010
2011
2012
Chapter
12-12
Customer list expense
Customer list
6,000,000
2,000,000
2,000,000
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
ArtisticRelated Intangible Assets
Examples are:
plays, literary works, musical works, pictures, photographs, and
video and audiovisual material.
Copyright is granted for the life of the creator plus 70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.
Chapter
12-13
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
ContractRelated Intangible Assets
Examples are:
franchise and licensing agreements, construction permits,
broadcast rights, and service or supply contracts.
Franchise (or license) with a limited life should be amortized to expense
over the life of the franchise.
Franchise with an indefinite life should be carried at cost and not
amortized.
Chapter
12-14
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
TechnologyRelated Intangible Assets
Examples are:
patented technology and trade secrets granted by the U.S. Patent
and Trademark Office.
Patent gives the holder exclusive use for a period of 20 years.
Capitalize costs of purchasing a patent.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent are capitalized to
Patent account.
Chapter
12-15
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Illustration: Harcott Co. incurs $180,000 in legal costs on January 1, 2010,
to successfully defend a patent. The patent’s useful life is 20 years, amortized
on a straightline basis. Harcott records the legal fees and the amortization at
the end of 2010 as follows.
Jan. 1
Patent
180,000
Cash
Dec. 31
Patent amortization expense
Patent
Chapter
12-16
180,000
9,000
9,000
LO 4 Describe the types of intangible assets.
Types of Intangibles
Types of Intangibles
Goodwill
Only recorded when an entire business is purchased because goodwill
cannot be separated from the business as a whole.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable net assets
over
acquired.
Internally created goodwill should not be capitalized.
Chapter
12-17
LO 5 Explain the conceptual issues related to goodwill.
Recording Goodwill
Recording Goodwill
Illustration: MultiDiversified, Inc. decides that it needs a parts division to
supplement its existing tractor distributorship. The president of Multi
Diversified is interested in buying Tractorling Company, a small concern in
Chicago. Illustration 123 presents the balance sheet of Tractorling Company.
Illustration 12-3
Chapter
12-18
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Illustration: MultiDiversified investigates Tractorling’s underlying assets to
determine their fair values.
Illustration 12-4
Tractorling Company decides to accept MultiDiversified’s offer of $400,000.
What is the value of the goodwill, if any?
Chapter
12-19
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Illustration: Determination of Goodwill.
Illustration 12-5
Chapter
12-20
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Illustration: MultiDiversified records this transaction as follows.
Chapter
12-21
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2010. The balance sheet of Local Company just prior to
acquisition is:
As s e t s
Ca s h
Re c e iva b le s
I nve nt o r ie s
Eq uip m e nt
T ot al
Co s t
FMV
$ 1 5 , 0 0 0
1 0 , 0 0 0
5 0 , 0 0 0
8 0 , 0 0 0
$ 1 5 5 , 0 0 0
$ 1 5 , 0 0 0
1 0 , 0 0 0
7 0 , 0 0 0
130, 000
$ 2 2 5 , 0 0 0
$ 2 5 , 0 0 0
100, 000
3 0 , 0 0 0
$ 1 5 5 , 0 0 0
$ 2 5 , 0 0 0
Lia b ilit ie s a nd Eq uit ie s
A c c o unt s p a y a b le
Co m m o n s t o c k
Re t a ine d e a r ning s
T ot al
Chapter
12-22
FMV of Net
Assets =
$200,000
$ 2 5 , 0 0 0
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2010. The value assigned to goodwill is determined as
follows:
Book Value = $130,000
Revaluation
$70,000
Fair Value = $200,000
Goodwill
$100,000
Purchase Price = $300,000
Chapter
12-23
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2010. The value assigned to goodwill is determined as
follows:
C a lc ula t io n o f Go o d will:
Cas h
$ 1 5 , 0 0 0
Re c e iva b le s
1 0 , 0 0 0
I nve nt o r ie s
7 0 , 0 0 0
Eq uipm e nt
130, 000
A c c o unt s pa y a b le
( 2 5 , 0 0 0 )
FMV o f id e nt if ia b le ne t a s s e t s
200, 000
Pur c h a s e pr ic e
300, 000
Go o d will
Chapter
12-24
$ 1 0 0 , 0 0 0
LO 6 Describe the accounting procedures for recording goodwill.
Recording Goodwill
Recording Goodwill
Example: Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2010. Prepare the journal entry to record the purchase of the
net assets of Local.
Journal entry recorded by Global:
Cash
Receivables
Inventory
Equipment
Goodwill
Accounts payable
Cash
Chapter
12-25
15,000
10,000
70,000
130,000
100,000
25,000
300,000
LO 6 Describe the accounting procedures for recording goodwill.