Book cover for Intermediate Accounting

Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

ISBN #9780470374948

13th Edition

695 Questions

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7,109 Students Helped

Homework Questions

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Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

Chapter 12 on Intangible Assets establishes a comprehensive framework for accounting nonphysical, long-term assets. It discusses methods for recording and amortizing finite-lived intangible assets, the essential practice of impairment testing for goodwill and indefinite-lived intangibles, and the treatment of R&D costs as expenses. This framework is critical for accurately reflecting the value and impact of intangible assets on an organization’s future earnings and overall financial health.

Learning Objectives

1

Explain the unique characteristics of intangible assets and their importance in financial reporting.

2

Describe the methods for initially recording and subsequently amortizing finite-lived intangible assets.

3

Understand the procedures for impairment testing for goodwill and indefinite-lived intangibles.

4

Analyze the treatment of research and development (R&D) costs and their impact on a company’s intangibility index.

5

Evaluate how intangible assets influence an organization’s future earnings and overall financial health.

Key Concepts

CONCEPT

DEFINITION

Intangible Assets

Nonphysical long-term assets that provide value to a company, such as patents, trademarks, copyrights, and goodwill.

Finite-Lived Intangible Assets

Intangible assets with a determinable useful life, which are amortized over time.

Indefinite-Lived Intangible Assets

Intangible assets that do not have a foreseeable limit to their useful life and are not amortized but are subject to impairment testing.

Goodwill

An intangible asset that arises when a company acquires another business, representing nonphysical factors such as brand reputation and customer relationships.

Amortization

The process of systematically reducing the book value of a finite-lived intangible asset over its useful life.

Impairment Testing

A procedure to assess whether the carrying value of an intangible asset exceeds its recoverable amount, necessitating a write-down.

R&D Costs

Expenses incurred for research and development activities; these costs are typically expensed as incurred rather than capitalized.

Example Problems

Example 1

Distinguish among depreciation, depletion, and amortization.

Example 2

Identify the factors that are relevant in determining the annual depreciation charge, and explain whether these factors are determined objectively or whether they are based on judgment

Example 3

Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree? Explain.

Example 4

Explain how estimation of service lives can result in unrealistically high valuations of fixed assets.

Example 5

The plant manager of a manufacturing firm suggested in a conference of the company's executives that accountants should speed up depreciation on the machinery in the finishing department because improvements were rapidly making those machines obsolete, and a depreciation fund big enough to cover their replacement is needed. Discuss the accounting concept of depreciation and the effect on a business concern of the depreciation recorded for plant assets, paying particular attention to the issues raised by the plant manager
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Step-by-Step Explanations

QUESTION

How do you initially record a finite-lived intangible asset and subsequently amortize it?

STEP-BY-STEP ANSWER:

Step 1: Identify the intangible asset (e.g., a patent, trademark) and determine its acquisition cost.
Step 2: Record the asset on the balance sheet at its initial cost at the time of acquisition.
Step 3: Determine the useful life of the intangible asset.
Step 4: Calculate annual amortization expense by dividing the cost by the useful life.
Step 5: Record the amortization expense periodically (usually annually) until the asset’s book value is reduced to zero or its residual value.
Final Answer:

Recording Finite-Lived Intangible Assets

QUESTION

How is impairment testing conducted for goodwill and indefinite-lived intangibles?

STEP-BY-STEP ANSWER:

Step 1: Identify the reporting unit to which the goodwill or indefinite-lived intangible asset is assigned.
Step 2: Estimate the fair value of the reporting unit using appropriate valuation techniques.
Step 3: Compare the fair value with the carrying value of the reporting unit, including goodwill.
Step 4: Determine if the carrying amount exceeds the fair value, which would indicate impairment.
Step 5: If impairment is identified, write down the asset to its fair value and record the impairment loss.
Final Answer:

Impairment Testing for Goodwill

QUESTION

How should R&D costs be treated according to the chapter?

STEP-BY-STEP ANSWER:

Step 1: Recognize that R&D costs are generally expensed as incurred rather than capitalized.
Step 2: Record R&D costs in the income statement in the period in which they are incurred.
Step 3: Understand that expensing R&D costs impacts current earnings and influences the company’s intangibility index.
Step 4: Review any alternative treatments subject to industry-specific regulations, if applicable.
Final Answer:

Treatment of R&D Costs

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Common Mistakes

  • Confusing the capitalization of costs with expensing; particularly misclassifying R&D costs as capitalizable expenses rather than recognizing them as incurred.
  • Failing to distinguish between finite-lived and indefinite-lived intangible assets, leading to improper applications of amortization and impairment testing.
  • Overlooking the need for periodic impairment testing on indefinite-lived intangible assets and goodwill, which may result in overstated asset values.
  • Misunderstanding the concept of amortization leading to incorrect calculation of expense allocation over the useful life of the asset.