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 provides a comprehensive overview of accounting for intangible assets, focusing on their recognition, measurement, and amortization. It emphasizes the critical need for annual impairment tests, especially for indefinite-life intangibles and goodwill, and explores different categories of intangibles such as marketing, customer-related, artistic, contract-related, and technology-related assets. Additionally, the chapter highlights the challenges surrounding the treatment of R&D expenditures, underlining the complexities and inherent judgments in valuing and reporting these assets in financial statements.

Learning Objectives

1

Understand the defining characteristics of intangible assets including the absence of physical substance and their dependence on rights or privileges.

2

Explain the processes for initial recognition, measurement at cost, and subsequent amortization for limited-life intangible assets.

3

Analyze the procedures and importance of conducting annual impairment tests for indefinite-life intangibles and goodwill.

4

Differentiate among various categories of intangible assets and discuss the treatment of R&D expenditures in financial reporting.

Key Concepts

CONCEPT

DEFINITION

Intangible Assets

Non-physical assets that provide value through legal rights or competitive advantages, such as patents, copyrights, and goodwill.

Amortization

The systematic allocation of the cost of a limited-life intangible asset over its useful life.

Impairment Test

An evaluation performed, usually on an annual basis, to determine if the carrying amount of an asset exceeds its recoverable amount.

Goodwill

An intangible asset that arises when a business is acquired for more than the fair value of its identifiable net assets, typically tested for impairment annually.

R&D Expenditures

Costs associated with research and development activities that are often expensed as incurred but may be capitalized under certain conditions.

Limited-Life vs. Indefinite-Life Intangibles

Limited-life intangibles have a determinable useful life and are amortized, while indefinite-life intangibles are not amortized but are subject to annual impairment testing.

Initial Recognition

The process by which an intangible asset is first recorded in the financial statements, typically measured at cost.

Example Problems

Example 1

What are the two main characteristics of intangible assets?

Example 2

If intangibles are acquired for stock, how is the cost of the intangible determined?

Example 3

Intangibles have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?

Example 4

Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?

Example 5

In 2010 Ghostbusters Corp. spent $\$ 420,000$ for "goodwill" visits by sales personnel to key customers. The purpose of these visits was to build a solid, friendly relationship for the future and to gain insight into the problems and needs of the companies served. How should this expenditure be reported?
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Step-by-Step Explanations

QUESTION

How do you calculate the annual amortization expense for a limited-life intangible asset?

STEP-BY-STEP ANSWER:

Step 1: Determine the initial cost of the intangible asset at acquisition.
Step 2: Identify any residual value if applicable; typically, many intangible assets have no residual value.
Step 3: Establish the useful life of the asset over which the cost will be amortized.
Step 4: Subtract any residual value from the initial cost, if applicable.
Step 5: Divide the resulting amount by the useful life to obtain the annual amortization expense.
Final Answer: The annual amortization expense is equal to (Cost - Residual Value) divided by the Useful Life.

Amortization of Limited-Life Intangible Assets

QUESTION

What are the steps involved in performing an annual impairment test on indefinite-life intangible assets?

STEP-BY-STEP ANSWER:

Step 1: Determine the carrying amount of the intangible asset on the balance sheet.
Step 2: Estimate the asset's recoverable amount by calculating the present value of expected future cash flows or using market-based valuations.
Step 3: Compare the carrying amount with the recoverable amount.
Step 4: If the carrying amount exceeds the recoverable amount, recognize an impairment loss equal to the difference.
Final Answer: An impairment loss is recorded when the carrying value of an indefinite-life intangible asset exceeds its recoverable amount.

Impairment Testing for Indefinite-Life Intangible Assets

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Common Mistakes

  • Confusing amortization of intangible assets with depreciation of tangible assets.
  • Failing to conduct regular impairment tests, especially for indefinite-life assets and goodwill.
  • Misclassifying R&D expenditures that should be expensed rather than capitalized.
  • Overlooking the distinctive characteristics of different categories of intangible assets, leading to errors in their measurement and reporting.