Intangible Assets

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

• $350,000
• $200,000
• $150,000
• $ 50,000

Problem 12 – 5 (c) Goodwill on 12/31/2003 should be

• $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

• $ 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

• $ 480,000
• $ 432,000
• $ 400,000
• $380,000

Exercise 12 -17: Research and development expense for 2003 is

• $ 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.