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Ch_12_Ques_&_Brief_Exercises - ANSWERS TO QUESTIONS...

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ANSWERS TO QUESTIONS 1. The two main characteristics of intangible assets are: (a) they lack physical substance. (b) they are not a financial instrument. 2. If intangibles are acquired for stock, the cost of the intangible is the fair value of the consideration given or the fair value of the consideration received, whichever is more clearly evident. 3. Limited-life intangibles should be amortized by systematic charges to expense over their useful life. An intangible asset with an indefinite life is not amortized. 4. When intangibles are created internally, it is often difficult to determine the validity of any future service potential. To permit deferral of these types of costs would lead to a great deal of subject-tivity because management could argue that almost any expense could be capitalized on the basis that it will increase future benefits. The cost of purchased intangibles, however, is capitalized because its cost can be objectively verified and reflects its fair value at the date of acquisition. 5. Companies cannot capitalize self-developed, self-maintained, or self-created goodwill. These expenditures would most likely be reported as selling expenses. 6. Factors to be considered in determining useful life are: 1. The expected use of the asset by the entity. 2. The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate. 3. Any legal, regulatory, or contractual provisions that may limit useful life. 4. Any legal, regulatory or contractual provisions that enable renewal or extension of the asset’s legal or contractual life without substantial cost. 5. The effects of obsolescence, demand, competition, and other economic factors. 6. The level of maintenance expenditure required to obtain the expected future cash flows from the asset. 7. The amount of amortization expensed for a limited-life intangible asset should reflect the pattern in which the asset is consumed or used up, if that pattern can be reliably determined. If the pattern of production or consumption cannot be determined, the straight-line method of amortization should be used. 8. This trademark is an indefinite life intangible and, therefore, should not be amortized. 9. The $190,000 should be expensed as research and development expense in 2006. The $91,000 is expensed as selling and promotion expense in 2006. The $45,000 of costs to legally obtain the patent should be capitalized and amortized over the useful or legal life of the patent, whichever is shorter.
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10. Patent Amortization Expense 45,000 Patents (or Accumulated Amortization-Patents) 45,000 11. Artistic-related intangible assets involve ownership rights to plays, pictures, photographs, and video and audiovisual material. These ownership rights are protected by copyrights. Contract related intangible assets represent the value of rights that arise from contractual arrangements. Examples are franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.
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Ch_12_Ques_&_Brief_Exercises - ANSWERS TO QUESTIONS...

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