CHAPTER 12
Intangible Assets
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Intangible assets;
concepts, definitions;
items comprising
intangible assets.
1, 2, 3, 4, 5, 6,
7, 8, 9, 10, 11,
12, 13, 14
1, 2, 3,
5, 6
1, 2, 3, 4
1, 2, 3
5.
Research and
development costs
and similar costs.
19, 20, 21,
22, 23, 24
9, 10, 11, 12
4, 16, 17
1, 2, 3
4, 5
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1.
Describe the characteristics of
intangible assets.
1
1, 2, 3
1, 2, 3, 4
2.
initial valuation
of intangible assets.
10, 11
3.
Explain the procedure for
amortizing intangible assets.
3, 7, 8, 10,
15, 25
1, 2, 3, 4,
12, 13
4, 5, 6, 7,
9, 10, 11,
1, 2, 3, 6
2
Identify the costs to include in the
2, 24
1, 2, 3, 4
5, 7, 9,
1, 2, 3, 6
1, 2
13
4.
Describe the types of intangible
assets.
4, 11, 15
1, 2, 3
1
5.
Explain the accounting issues for
recording goodwill.
5, 12, 13,
14, 18
5
12, 13,
15
5, 6
6.
Explain the accounting issues
related to intangible-asset
impairments.
6, 7, 16,
17, 18
6, 7, 8
14, 15
5, 6
7.
Identify the conceptual issues
related to research and
development costs.
10, 19, 24
5, 9
3, 4
8.
Describe the accounting for
research and development and
similar costs.
9, 20, 21,
22, 23, 24
9, 10, 11,
4, 6, 8,
16, 17
4
3, 4
9.
Indicate the presentation of
intangible assets
and related items.
13
4, 6
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E12-1
Classification issues—intangibles.
Moderate
15–20
E12-2
Classification issues—intangibles.
Simple
10–15
E12-3
Classification issues—intangible asset.
Moderate
10–15
E12-4
Intangible amortization.
Moderate
15–20
E12-5
Correct intangible asset account.
Moderate
15–20
E12-6
Recording and amortization of intangibles.
Simple
15–20
E12-7
Accounting for trade name.
Simple
10–15
E12-8
Accounting for organization costs.
Simple
10–15
E12-9
Accounting for patents, franchises, and R&D.
Moderate
15–20
E12-10
Accounting for patents.
Moderate
20–25
E12-11
Accounting for patents.
Moderate
15–20
E12-12
Accounting for goodwill.
Moderate
20–25
E12-13
Accounting for goodwill.
Simple
10–15
E12-14
Copyright impairment.
Simple
15–20
E12-15
Goodwill impairment.
Simple
15–20
E12-16
Accounting for R&D costs.
Moderate
15–20
E12-17
Accounting for R&D costs.
10–15
P12-1
Correct intangible asset account.
Moderate
15–20
P12-2
Accounting for patents.
Moderate
20–30
P12-3
Accounting for franchise, patents, and trade name.
Moderate
20–30
P12-4
Accounting for R&D costs.
Moderate
15–20
P12-5
Goodwill, impairment.
25–30
P12-6
Comprehensive intangible assets.
Moderate
30–35
CA12-1
Accounting for pre-opening costs.
Moderate
20–25
CA12-2
Accounting for patents.
Moderate
25–30
CA12-3
Accounting for research and development costs.
Moderate
25–30
CA12-4
Accounting for research and development costs.
Moderate
20–25
SOLUTIONS TO CODIFICATION EXERCISES
CE12-1
According to the Master Glossary:
(a) Intangible assets are assets (not including financial assets) that lack physical substance. (The
term intangible assets is used to refer to intangible assets other than goodwill.)
(b) An asset representing the future economic benefits arising from other assets acquired in a
(c) Research and Development:
Research is planned search or critical investigation aimed at discovery of new knowledge with the
hope that such knowledge will be useful in developing a new product or service (referred to as
(d) A development stage entity is an entity devoting substantially all of its efforts to establishing a new
business and for which either of the following conditions exists:
1. Planned principal operations have not commenced.
CE12-2
See FASB ASC 350-30–35. In the discussions related to “Determining the Useful Life of an Intangible
Asset”
35-1 The accounting for a recognized intangible asset is based on its useful life to the reporting
35-2 The useful life of an intangible asset to an entity is the period over which the asset is expected
to contribute directly or indirectly to the future cash flows of that entity. The useful life is not the
CE12-2 (Continued)
35-3 The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of
all pertinent factors, in particular, all of the following factors with no one factor being more
presumptive than the other:
a. The expected use of the asset by the entity.
b. The expected useful life of another asset or a group of assets to which the useful life of the
intangible asset may relate.
c. Any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows
and useful lives of intangible assets that are based on legal rights are constrained by the
Further, if an income approach is used to measure the fair value of an intangible asset, in
determining the useful life of the intangible asset for amortization purposes, an entity shall
consider the period of expected cash flows used to measure the fair value of the intangible
asset adjusted as appropriate for the entity-specific factors in this paragraph.
35-4 If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of
an intangible asset to the reporting entity, the useful life of the asset shall be considered to be
CE12-3
According the FASB ASC 730-10-50:
50-1 Disclosure shall be made in the financial statements of the total research and development
CE12-4
According the FASB ASC 926-720-25,
General
Overall Deals
25-1 An entity may enter into an overall deal arrangement. An entity shall charge the costs of overall
ANSWERS TO QUESTIONS
1. The two main characteristics of intangible assets are:
(a) they lack physical substance.
(b) they are not a financial instrument.
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-
5. Companies cannot capitalize self-developed, self-maintained, or self-created goodwill. These expen-
ditures would most likely be reported as selling expenses.
6. Factors to be considered in determining useful life are:
(a) The expected use of the asset by the entity.
7. The amount of amortization expensed for a limited-life intangible asset should reflect the pattern in
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 2014. The $91,000 is
10. Amortization Expense ………………………………………………………….. 35,000
Patents (or Accumulated Patent Amortization) ……………………. 35,000
Straight-line amortization is used because the pattern of use cannot be reliably determined.
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
Questions Chapter 12 (Continued)
12. Varying approaches are used to define goodwill. They are
(a) Goodwill should be measured initially as the excess of the fair value of the acquisition cost
over the fair value of the net assets acquired. This definition is a measurement definition but
does not conceptually define goodwill.
13. Goodwill is recorded only when it is acquired by purchase. Goodwill acquired in a business
combination is considered to have an indefinite life and therefore should not be amortized, but
should be tested for impairment on at least an annual basis.
14. Many analysts believe that the value of goodwill is so subjective that it should not be given the
same status as other types of assets such as cash, receivables, inventory, etc. The analysts are
15. Accounting standards require that if events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable, then the carrying amount of the asset should be
assessed. The assessment or review takes the form of a recoverability test that compares the sum
16. Under U.S. GAAP, impairment losses on assets held for use may not be restored.
17. Impairment losses are reported as part of income from continuing operations, generally in the
“Other expenses and losses” section. Impairment losses (and recovery of losses for assets to be
18. The amount of goodwill impaired is $40,000, computed as follows:
Questions Chapter 12 (Continued)
19. Research and development costs are incurred to develop new products or processes, to improve
present products, or to discover new knowledge. R&D expenditures present problems of
(1) identifying the costs associated with particular activities, projects, or achievements, and
(2) determining the magnitude of the future benefits and the length of time over which such
benefits may be realized. R&D activities may incur costs classified as follows:
20. (a) Personnel (labor) type costs incurred in R&D activities should be expensed as incurred.
(b) Materials and equipment costs should be expensed immediately unless the items have
21. (a) Expense as R&D.
(b) Expense as R&D.
(c) Capitalize as patent and/or license and amortize.
Also, see Illustration 12-14 (page 22).
24. These costs are referred to as start-up costs, or more specifically organizational costs in this case.
The accounting for start-up costs is straightforward—expense these costs as incurred. The
profession recognizes that these costs are incurred with the expectation that future revenues will
occur or increased efficiencies will result. However, to determine the amount and timing of future
benefits is so difficult that a conservative approach—expensing these costs as incurred—is
required.
25. The total life, per revised facts, is 40 years (10 + 30). There are 30 (40 – 10) remaining years for
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 12-1
Patents …………………………………………………………………..
54,000
Amortization Expense ……………………………………………..
BRIEF EXERCISE 12-2
Patents …………………………………………………………………..
24,000
Amortization Expense ……………………………………………..
BRIEF EXERCISE 12-3
Trade Names …………………………………………………………..
68,000
Amortization Expense ……………………………………………..
BRIEF EXERCISE 12-4
Franchises ……………………………………………………………..
120,000
Amortization Expense ……………………………………………..
BRIEF EXERCISE 12-5
Purchase price …………………………………………………….
$700,000
Fair value of assets ………………………………………………
Fair value of liabilities …………………………………………..
Fair value of net assets …………………………………………
BRIEF EXERCISE 12-6
Loss on Impairment ………………………………………………..
190,000
Patents ($300,000 – $110,000) ………………………….
BRIEF EXERCISE 12-7
Because the fair value of the division exceeds the carrying amount of the
BRIEF EXERCISE 12-8
Loss on Impairment ($400,000 – $350,000) ……………….
50,000
Goodwill ……………………………………………………….
BRIEF EXERCISE 12-9
Organization Expense ……………………………………………..
60,000
Cash …………………………..………………………………….
60,000
BRIEF EXERCISE 12-10
BRIEF EXERCISE 12-11
(a) Capitalize
BRIEF EXERCISE 12-12
Carrying
Amount
Life in
Months
Amortization
Per Month
Months
Amortization
Patent (1/1/14)
$288,000
96
$3,000
12
BRIEF EXERCISE 12-13
Copyright No. 1 for $9,900 should be expensed and therefore not reported
on the balance sheet.
Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 12–13
SOLUTIONS TO EXERCISES
EXERCISE 12-1 (15–20 minutes)
(a) 10, 13, 15, 16, 17, 19, 23
(b) 1. Long-term investments in the balance sheet.
2. Property, plant, and equipment in the balance sheet.
3. Research and development expense in the income statement.
4. Current asset (prepaid rent) in the balance sheet.
12. Research and development expense in the income statement.
14. Research and development expense in the income statement.
18. Research and development expense in the income statement.
EXERCISE 12-2 (10–15 minutes)
The following items would be classified as an intangible asset:
Cable television franchises Film contract rights
Music copyrights Customer lists
EXERCISE 12-2 (Continued)
Investments in affiliated companies would be classified as part of the
investments section of the balance sheet.
EXERCISE 12-3 (10–15 minutes)
(a)
Trademarks
$15,000
Excess of cost over fair value of net identifiable
assets of acquired subsidiary (goodwill)
(b) Organization costs, $24,000, should be expensed. Discount on bonds
payable, $35,000, should be reported as a contra account to bonds
payable in the long-term liabilities section.
EXERCISE 12-4 (15–20 minutes)
1. Alatorre should report the patent at $600,000 (net of $400,000
accumulated amortization) on the balance sheet. The computation of
Amortization for 2012 and 2013 ($1,000,000/10) X 2
2014 amortization: ($1,000,000 – $200,000) ÷ (6 – 2)
2. Alatorre should amortize the franchise over its estimated useful life.
Because it is uncertain that Alatorre will be able to retain the franchise
3. These costs should be expensed as incurred. Therefore $275,000 of
organization expense is reported in income for 2014.
4. Because the license can be easily renewed (at nominal cost), it has an
EXERCISE 12-5 (15–20 minutes)
Research and Development Expense ………………………..
940,000
Patents ……………………………………………………………………
75,000
Rent Expense [(5 ÷ 7) X $91,000] ……………………………….
65,000
Prepaid Rent [(2 ÷ 7) X $91,000] …………………………..……
Advertising Expense ………………………………………………..
Income Summary …………………………………………………….
Discount on Bonds Payable ……………………………………..
Interest Expense ……………………………………………………..
Paid in Capital in Excess of Par on Common Stock …..
Intangible Assets …………………………..…………………..
Amortization Expense [($75,000 ÷ 10) X 1/2] ……………..
EXERCISE 12-6 (15–20 minutes)
Patents …………………………………………………………………..
350,000
Goodwill …………………………………………………………………
360,000
Franchise ……………………………………………………….
450,000
Copyright ……………………………………………………….
156,000
Research and Development Expense ……………………….
215,000
Intangible Assets …………………………………………….
1,531,000
Amortization Expense ……………………………………………..
Patents ($350,000/8) ………………………………………..
Franchise ($450,000/10 X 6/12) …………………………
Copyright ($156,000/5 X 5/12) …………………………..
EXERCISE 12-7 (10–15 minutes)
(a) 2013 amortization: $16,000 ÷ 10 = $1,600.
12/31/13 book value: $16,000 – $1,600 = $14,400.
(c) Carrying amount ($19,733) > future cash flows ($16,000); thus the
trade name fails the recoverability test. The new carrying value is
$15,000—the trade name’s fair value.
EXERCISE 12-8 (10–15 minutes)
(a)
Attorney’s fees in connection with organization
of the company
$15,000
Costs of meetings of incorporators to discuss
organizational activities
State filing fees to incorporate
1,000
(b)
Organization Expense …………………………………………….
23,000
Cash (Payables) ……………………………………………..
EXERCISE 12-9 (15–20 minutes)
(a) JIMMY CARTER COMPANY
Intangibles Section of Balance Sheet
December 31, 2014
Patent from Ford Company, net of accumulated
Schedule 1 Computation of Patent from Ford Company
Cost of patent at date of purchase
$2,000,000
Amortization of patent for 2013 ($2,000,000 ÷ 10 years)
Amortization of patent for 2014 ($1,800,000 ÷ 5 years)
Schedule 2 Computation of Franchise from Reagan Company
Cost of franchise at date of purchase
$ 480,000
Amortization of franchise for 2014 ($480,000 ÷ 10)
EXERCISE 12-9 (Continued)
(b) JIMMY CARTER COMPANY
Income Statement Effect
For the year ended December 31, 2014
Patent from Ford Company:
Amortization of patent for 2014
($1,800,000 ÷ 5 years)
$360,000
Franchise from Reagan Company:
Amortization of franchise for 2014
($480,000 ÷ 10)
Payment to Reagan Company
($2,500,000 X 5%)
Research and development costs
EXERCISE 12-10 (15–20 minutes)
(a)
2010
Research and Development Expense ……………………….
170,000
Cash ……………………………………………………….
170,000
Patents ……………………………………………………….
Cash ……………………………………………………….
Amortization Expense …………………………..
Patents [($18,000 ÷ 10) X 3/12] ………………………….
2011
Amortization Expense …………………………..
Patents ($18,000 ÷ 10) …………………………..
EXERCISE 12-10 (Continued)
(b)
2012
Patents ……………………………………………………….
9,480
Cash ……………………………………………………….
9,480
Amortization Expense ……………………………………………..
1,940
Patents ($750 + $1,190) …………………………..
1,940
[Jan. 1–June 1: ($18,000 ÷ 10) X
5/12 = $750
June 1–Dec. 31: ($18,000 – $450 –
$1,800 – $750 + $9,480) = $24,480;
($24,480 ÷ 12) X 7/12 = $1,190]
2013
Amortization Expense ……………………………………………..
Patents ($24,480 ÷ 12) …………………………..
2,040
(c)
2014 and 2015
Amortization Expense ……………………………………………..
10,625
Patents ($21,250 ÷ 2) …………………………..
($24,480 – $1,190 – $2,040) = $21,250
EXERCISE 12-11
(a)
Patent A
Life in years
17
Life in months (12 X 17)
204
Amortization per month ($30,600 ÷ 204)
$150
Number of months amortized to date
Year
Month
2010
10
2013
12
EXERCISE 12-11 (Continued)
Patent B
Life in years
10
Life in months (12 X 10)
120
Amortization per month ($15,000 ÷ 120)
$125
Number of months amortized to date
Year
Month
2011
6
2012
12
Book value 12/31/13 $11,250: ($15,000 – [$125 X 30])
Patent C
Life in years
4
Life in months (12 X 4)
48
Amortization per month ($14,400 ÷ 48)
Number of months amortized to date
Year
Book value 12/31/13 $9,600: ($14,400 – [$300 X 16])
At December 31, 2013
Patent A
$23,700
Patent B
Patent C