136B HW#1

136B HW#1 - incurred internally to create the intangibles...

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Allison Cox 8698037 Econ 136B 10/21/08 Ch.12 Homework Creating revenue as well as future revenue is vitally important for any business. Acquiring assets is one-way companies push that effort. An asset is defined as a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. Despite the simple definition of an asset, there are many “gray areas” with accounting, especially with intangibles like Research and Development (R&D). The issues that arise from R&D is that it requires costs to be expense if the company who own the intangible created it, but if a company purchases the R&D it is then capitalize. Most R&D is expensed because it is normal to assume that companies create intangibles to benefit the company through revenue. This makes sense because the costs
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Unformatted text preview: incurred internally to create the intangibles bear no relationship to the their real value. An intangible may cost $1,000,000 and create no revenue while another may cost $100,000 and create millions in revenue. Essentially, R&D can be seen as a gamble for companies because they never know the total outcome of their investment. Additionally, it is very difficult to even put a fair value measurement on the intangible to be capitalized. In order to establish the fair value of the intangibles the third level on the fair value hierarchy would need to be used. This level is the least reliable because the value is determined through assumptions and estimates, which could then result in manipulation....
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