Intangible Assets:
• Purchased
– Patents, franchise, trademarks, copyrights,
goodwill
• Self developed
– Patents, trademarks, copyrights, software
Purchased Intangible Assets:
• Record at cost
• If no limited useful life (e.g., trademark,
goodwill)
– Maintain original cost
– Evaluate periodically for impairment
• If impairment determined – write down
Problem 12 – 5 (b) Goodwill on
12/31/2003 should be
A.
B.
C.
D.
$350,000
$200,000
$150,000
$ 50,000
Problem 12 – 5 (c) Goodwill on
12/31/2003 should be
A.
B.
C.
D.
$350,000
$200,000
$150,000
$ 50,000
Purchased Intangible Assets:
• Record at cost
• If limited useful or legal life (patents,
copyrights, e.g.)
– Amortize, straight line, generally time based
– Amortize over shorter of useful or legal life
Exercise 12 -9: The patent should be
reported on the 2004 Balance sheet at
A.
B.
C.
D.
$ 2,000,000
$ 1,600,000
$ 1,440,000
$1,200,000
Exercise 12 -9: The franchise should be
reported on the 2004 Balance sheet at
A.
B.
C.
D.
$ 480,000
$ 432,000
$ 400,000
$380,000
Exercise 12 -17: Research and
development expense for 2003 is
A.
B.
C.
D.
$ 337,000
$ 427,000
$ 393,000
$ 707,000
Internally developed Intangibles
• Generally all costs expensed as R&D or
other expenses (advertising, salaries, etc.)
• Exceptions:
– Legal fees (register patent, defend patent)
– Some costs for software developed for third
party use
Software Developed for Third Party
Use (FAS 86)
• Until technological feasibility is established
all costs are expensed to R&D
• Once technological feasibility is
established, costs are capitalized and
subsequently amortized
Exercise 12-19
• Determine the amount at which the
software should be reported on the
balance sheet at December 31, 2004
Software Developed for Third Party
Use (FAS 86)
Amortization: Straight Line
• Either over time OR
• Proportionate to expected revenue,
whichever is greater.
Software Developed for Third Party
Use (FAS 86) Example:
Capitalized cost:
$300,000
Expected life
3 years
Expected revenue
$1,000,000
Year 1 revenue earned:
400,000
Amortization (years)
$100,000
Revenue based: 400/1000 * 300 = $120
$120 > $100, Amortization: $120,000
Software Developed for Third Party
Use (FAS 86)
• Software developed for external use must
be reported at the lower of amortized cost
or net realizable value.
• Once written down, may NOT be written
up again.