CHAPTER 12 Intangible Assets

CHAPTER 12 Intangible Assets - CHAPTER 12 Intangible Assets...

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12-1 CHAPTER 12 Intangible Assets
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12-2 LECTURE OUTLINE This chapter can be covered in one or two class sessions. Students generally do not have difficulty in understanding the accounting procedures related to the capitalization of intangibles and their subsequent amortization. Illustrations 12-2 and 12-3 provide numerical examples of recording goodwill (master valuation approach) and developing an approximate value for goodwill (excess earning power approach). A. Intangible Asset Issues: Characterized by a lack of physical existence, and a high degree of uncertainty concerning future benefits. 1. Characteristics: a. Identifiability. b. Manner of acquisition: Whether singly, in groups, in business combinations, or developed internally. c. Expected period of benefit. d. Separability from an entire enterprise. 2. Valuation: a. Purchased intangibles: Intangibles should be recorded at cost, which includes all expenditures necessary to make the intangible asset ready for its intended use. b. Internally created intangibles: only the direct costs incurred in obtaining the intangible asset, such as legal costs are capitalizable. All research and development costs are expensed as incurred.
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12-3 3. Amortization: Amortized by systematic charges over their useful lives. Factors to be considered in determining useful life include legal provisions and economic factors such as obsolescence and expected actions of competitors. a. Generally amortized on a straight-line basis. b. Amorization period may not exceed 40 years. c. Amortization is usually credited against the asset account. B. Specifically Identifiable Intangibles: Costs associated with obtaining a given intangible asset can be identified as a part of the cost of that asset. TEACHING TIP Illustration 12-1 can be used to present an overview of the types of intangible assets that are externally acquired or internally developed. 1. Patents. The holder has the exclusive right to use, manufacture, and sell a product or process for a period of 17 years. The cost of the patent should be amortized over the shorter of its legal life, 17 years, or its useful life. 2. Copyrights. The legal life is the life of the creator plus 50 years but such assets are written off over the period benefited (not to exceed 40 years). 3. Trademarks and trade names. A work, phrase, or symbol that distinguishes or identifies a particular enterprise or product. Although trademarks and trade names have indefinite lives, their costs should be amortized over a period not to exceed 40 years.
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