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Chapter 12 - 2 Describe the accounting for research and...

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1. Describe the accounting for limited life intangible assets; e.g., valuation, amortization (if applicable), and impairment. Examples: patent (20 year legal life), copyright (life of author plus 70 years). Amortize limited life IA--straight line basis (cost-residual/est. useful life or legal life-- whichever is less). Journal entry includes a debit to amortization expense and a credit to the specific intangible asset. Companies should evaluate limited life intangibles on a regular basis for impairment. Must perform recoverability test first for impairment, if the sum of the undiscounted cash flows is less than the carrying amount then the company would record an impairment loss. The company then uses the fair value test, measures the impairment loss by comparing the asset's fair value with the carrying amount. The entry appears in the "other expenses and losses."
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Unformatted text preview: 2. Describe the accounting for research and development costs, including the reason for the current accounting treatment. Companies must expense all research and development costs when incurred according to GAAP. Research and Development, and start up costs do not qualify as assets because they do not have probable future economic benefit, thus it must be expensed. 3. Describe the accounting for indefinite life intangible assets other than goodwill, e.g., valuation, amortization (if applicable), and impairment. Examples: trademark Do not amortize indefinite life IA, instead you must test annually for impairment. Impairment-use fair value test: compare the FV of IA with the assets carrying amount. If the FV < carrying amount, then recognize an impairment loss....
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