CHAPTER 12
INTANGIBLE ASSETS
Sommers – ACCT 3311
Discussion Questions
Q12-1 What are the two main characteristics of intangible
assets?
Normally classified as long-term asset.
Common types of intangibles:

Patents

Trademarks or trade names

Copyrights

Goodwill

Franchises or licenses
Valuation of Intangibles
Purchased Intangibles:

Recorded at cost.

Includes all costs necessary to make the intangible asset ready
for its intended use.

Typical costs include:
►
Purchase price.
►
Legal fees.
►
Other incidental expenses.
Internally Created Intangibles:

Generally expensed.

Only capitalize direct costs incurred in developing the intangible,
such as legal costs.
Example 1: Acquisition of Intangibles
Freitas Corporation was organized early in 2011. The following
expenditures were made during the first few months of the year:
Attorneys’ fees in connection with the
organization of the corporation
$ 12,000
State filing fees and other incorporation costs
3,000
Purchase of a patent
20,000
Legal and other fees for transfer of the patent
2,000
Purchase of furniture
30,000
Pre-opening salaries
40,000
Total
$107,000
Prepare a summary journal entry to record the $107,000 in cash
expenditures.
Example 1: Continued
Discussion Questions
Q12-2 If intangibles are acquired for stock, how is the cost
of the intangible determined?
Amortization of Intangibles
Limited-Life Intangibles:

Amortize by systematic charge to expense over useful life.

Credit asset account for amortization.

Useful life should reflect the periods over which the asset will
contribute to cash flows.

Amortization should be cost less residual value.
Indefinite-Life Intangibles:

No foreseeable limit on time the asset is expected to provide
cash flows.

No amortization.

Must test indefinite-life intangibles for impairment at least
annually.
Example 2: Amortization
Janes Company provided the following information on intangible
assets:
a. A patent was purchased from the Lou Company for $700,000
on January 1, 2009. Janes estimated the remaining useful
life of the patent to be 10 years. The patent was carried on
Lou’s accounting records at a net book value of $350,000
when Lou sold it to Janes.
b. During 2011, a franchise was purchased from the Rink
Company for $500,000. The contractual life of the franchise
is 10 years and Janes records a full year of amortization in
the year of purchase.
Prepare the entries necessary in 2009 and 2011 to reflect the
above information. Also, prepare a schedule showing the
intangible asset section of Janes’ December 31, 2011, balance
sheet.
Example 2: Continued
Example 3: Amortization & Defense
On January 2, 2011, David Corporation purchased a patent
for $500,000. The remaining legal life is 12 years, but the
company estimated that the patent will be useful only for
eight years. In January 2013, the company incurred legal
fees of $45,000 in successfully defending a patent
infringement suit. The successful defense did not change
the company’s estimate of useful life.
Prepare journal entries related to the patent for 2011, 2012,
and 2013.
Example 3: Continued
Example 3: Continued
Calculation of revised annual amortization:
December 31, 2013
Discussion Questions
Q12-12 What is goodwill?
Discussion Questions
Q12-12 What is negative goodwill?
Goodwill
Conceptually, represents the future economic benefits arising
from the other assets acquired in a business combination that
are not individually identified and separately recognized.
Only recorded when an entire business is purchased.
Goodwill is measured as the excess of ...
cost of the purchase over the FMV of the identifiable net
assets purchased.
Internally created goodwill should not be capitalized.
Example 4: Goodwill on Purchase
Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2012. The balance sheet of Local Company
just prior to acquisition is:
Assets
Cash
Receivables
Inventories
Equipment
Total
Liabilities and Equities
Accounts payable
Common stock
Retained earnings
Total
$
$
$
$
Cost
15,000
10,000
50,000
80,000
155,000
25,000
100,000
30,000
155,000
$
FMV
15,000
10,000
70,000
130,000
225,000
$
25,000
$
25,000
$
FMV of Net
Assets =
$200,000
Example 4: Continued
Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2012. 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
Example 4: Continued
Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2012. The value assigned to goodwill is
determined as follows:
Calculation of Goodwill:
Cash
$
15,000
Receivables
10,000
Inventories
70,000
Equipment
130,000
Accounts payable
(25,000)
FMV of identifiable net assets
200,000
Purchase price
300,000
Goodwill
$
100,000
Example 4: Continued
Global Corporation purchased the net assets of Local Company for
$300,000 on December 31, 2012. Prepare the journal entry to record the
purchase of the net assets of Local.
Journal entry recorded by Global:
Cash
15,000
Receivables
10,000
Inventory
70,000
Equipment
130,000
Goodwill
100,000
Accounts payable
Cash
25,000
300,000
Example 5: Goodwill on Purchase
Johnson Corporation purchased all of the outstanding
common stock of Smith Corporation for $11,000,000 in
cash. The book value of Smith’s net assets (assets minus
liabilities) was $7,800,000. The fair values of all of Smith’s
assets and liabilities were equal to their book values with
the following exceptions:
Book Value Fair Value
Receivables
$1,300,000 $1,100,000
Property, plant, & equipment 8,000,000
9,400,000
Intangible assets
200,000
1,200,000
Calculate the amount paid for goodwill.
Example 5: Continued
Other goodwill Issues
Goodwill Write-off

Goodwill considered to have an indefinite life.

Should not be amortized.

Only adjust carrying value when goodwill is impaired
(next time).
Bargain Purchase

Purchase price less than the fair value of net assets
acquired.

Amount is recorded as a gain by the purchaser.
Example 6: Amortization
The following information concerns the intangible assets of Epstein
Corporation:
a. On June 30, 2011, Epstein completed the purchase of the
Johnstone Corporation for $2,000,000 in cash. The fair value of the
net identifiable assets of Johnstone was $1,700,000.
b. Included in the assets purchased from Johnstone was a patent that
was valued at $80,000. The remaining legal life of the patent was
13 years, but Epstein believes that the patent will only be useful for
another eight years.
c. Epstein acquired a franchise on October 1, 2011, by paying an
initial franchise fee of $300,000. The contractual life of the
franchise is 10 years.
Prepare year-end adjusting journal entries to record amortization
expense on the intangibles at December 31, 2011. Also, prepare the
intangible asset section of the December 31, 2011 balance sheet.
Example 6: Continued
Comprehensive Problem