Costs incurred internally to design, develop, research, create a product, process or service are expensed as incurre

Costs included in specific Intangible Asset accounts:

1. Costs incurred to acquire (purchase) something created by someone else (patents, trademarks, copyrights, franc
are recorded as an intangible asset on the balance sheet (capitalizing).
2. Registration costs of patenting, trademarking and copyrighting.
3. Legal costs incurred to defend the right to use a product/idea.
Amortization of Intangible Assets:
If an intangible asset has a limited life, allocate the cost of acquiring the intangible asset over the shorter of its
legal life or useful life. The expense is called amortization and is usually measured using the straight-line method.

The journal entry for amortization:

Debit Amoritzation Expense (an operating expense on the income statement)
Credit the specific Intangible Asset account to reduce its carrying value

The balance sheet reports:

Cost of the intangible asset
Less: Accumulated Amortization
Carrying Value (also called book value)

Intangible assets with an indefinite useful life are not amortized.

Organizational costs are expensed as incurred. Since they are not capitalized, they are not amortized.

Examples 1, 2 and 3

Impairment of Intangible Assets (same as impairment for buildings and equipment)

Recoverability test: if the carrying value (book value) is greater than the expected total cash flows from the intangible
impairment is needed.

The impairment loss is the difference between carrying value (book value) and fair value

The journal entry to record the impairment:

Debit Impairment Loss (non operating expense on the income statement)
Credit the specific Intangible Asset account

Examples 4 and 5
e are expensed as incurred.

demarks, copyrights, franchises, licenses)

ver the shorter of its

the straight-line method.

ot amortized.

sh flows from the intangible asset,

Assume that Merck purchased a patent from another company on January 1, 2020 for $54,000.
The patent has a remaining legal life of 16 years.
Merck estimates that the patent will be useful for 10 years.

Record Merck’s entry on 1/1/20 for the purchase of the patent.

Patent 54,000
Cash 54,000

Record Merck’s entry on 12/31/20 for amortization of the patent.

Amortization expense = Cost / estimated useful life

Amortization Expense 5,400 54,000 / 10

Patent 5,400

What is the carrying value of the patent on 12/31/20?

Cost 54,000
Less: Accumulated Depreciation 5,400
Carrying Value 48,600

Assume that in January of 2022, when the carrying value of Merck’s patent is $43,200, Merck
spends $24,000 successfully defending the patent in court. Merck estimates the patent will be
useful until the end of 2029.

Record Merck’s entry on in January 2022 for legal costs of defending the patent.

Patent 24,000
Cash 24,000

What is the amount of amortization expense that will be recorded at the end of the year?

Beginning carrying value, 1/1/22 43,200

Add: capitalized legal costs 24,000
New Carrying Value 67,200 Allocate this amount over remaining useful life

Record Merck’s entry for amortization expense for the year ended 12/31/22.

Amortization Expense 8,400 67,200 / 8 years remaining

Patent 8,400
ng useful life

8 years remaining
Assume that Big Tech Company incurred the following costs this period:
· When the company begain on Jan. 1, 2020, it incurred $60,000 of costs due to fees to underwriters, legal fees,
expenditures during its formation.
· Purchased a license for $20,000 on Jan. 1, 2020. The license gives the company exclusive rights to sell its ser
expire at the end of ten years.
· Purchased a patent on Jan. 2, 2020 for $40,000. It is estimated to have a 5-year useful life and has a legal life
· Costs incurred on Jan. 2, 2020 to develop an exclusive internet connection process totaled $45,000.

You are preparing the year-end 12/31/20 balance sheet and income statement and need to answer the following qu

What will the year-ened 2020 income statement and balance sheet report related to the organization costs?
The income statement will report $60,000 organization costs for 2020
The balance sheet will not report anything related to the organizational costs

What will the year-ened 2020 income statement and balance sheet report related to the license?
The income statement will report Amortization Expense of $2,000 (20,000 /10)

The balance sheet will report:

Cost 20,000
Less: Accum. Amort. 2,000
Carrying Value 18,000

What will the year-ened 2020 income statement and balance sheet report related to the patent?
The income statement will report Amortization Expense of $8,000 (40,000 /5)

The balance sheet will report:

Cost 40,000
Less: Accum. Amort. 8,000
Carrying Value 32,000

What will the year-ened 2020 income statement and balance sheet report related to the costs of developing
The income statement will report Research and Development Expense of $45,000
The balance sheet will not report anything related to the cost of developing the new process.

What is the amount of total Intangible Assets that will be reported on the 12/31/20 balance sheet?
License 18,000
Patent 32,000
Total 50,000
es to underwriters, legal fees, and promotional

exclusive rights to sell its services and will

useful life and has a legal life of 20-years.

ss totaled $45,000.

ed to answer the following questions.

to the organization costs?

to the license?

to the patent?

to the costs of developing the new internet process?

0 balance sheet?
Assume that Darden Restaurants purchases a franchise from McDonald’s for $120,000 on
April 1, 2020. The franchise grants Darden Restaurants the right to sell certain products for a
period of 8 years.

Record Darden Restaurant’s entry on April 1, 2020.

Franchise 120,000
Cash 120,000

Record Darden Restaurant’s entry on 12/31/20.

Amortization Expense 11,250 (120,000 / 8 years) x (9/12 months)

Franchise 11,250

At what amount would the franchise be reported on Darden Restaurant’s 12/31/20 balance sheet?

Cost 120,000
Less: Accumulated Amortization 11,250
Carrying Value 108,750

Would either of the entries recorded above change if the franchise was expected to have an
indefinite useful life instead of 8 years?
The first entry for the purchase of the franchise would stay the same
However, there is no entry for Amortization Expense if the franchise has an indefinite useful life.
/ 8 years) x (9/12 months)

1/20 balance sheet?

ted to have an

te useful life.
Lerch, Inc. has a patent on how to extract oil from shale rock. Unfortunately, several recent non-shale oil discoveries
the demand for shale-oil technology. As a result, Lerch performs a recoverability test. It finds that the expected futur
this patent are $35 million. Lerch’s patent has a carrying amount of $60 million. Discounting the expected future net
market rate of interest, Lerch determines the fair value of its patent to be $20 million.

Determine whether the patent is impaired and if so, record the journal entry for the impairment.

Recoverability test:
Carrying value of 60,000,000 is greater than the expected future cash flows of 35,000,000. Impairment is needed.

Carrying value 60,000,000

Fair value 20,000,000
Impairment loss amount 40,000,000

Impairment loss 40,000,000

Patent 40,000,000

What amount will the balance sheet report related to the Patent?
Patent 20,000,000 After impairment is recorded, the carying value will equal fair value
t non-shale oil discoveries adversely affected
ds that the expected future net cash flows from
g the expected future net cash flows at its

mpairment.

Impairment is needed.
Assume that Moderna purchased a patent from NuDrug Company for $1,000,000 on Jan. 1, 2020.
The patent is being amortized over its remaining legal life of 10 years.

On Jan. 1, 2021, legal costs of $200,000 were incurred to successfully defend the patent.

Calculate amortization for 2020, the 12/31/20 book value, 2021 amortization, and 12/31/21 book value.

Amortization expense for 2020 100,000 1,000,000 / 10 years

Book value on 12/31/2020 900,000 Cost of 1,000,000 - Accum. Amort. 100,000
Amortization expense for 2021 122,222 Book value on 1/1/20 900,000 + Legal costs on 1/1/2
Book value on 12/31/2021 977,778 900,000 - 122,222

At the beginning of 2022, Moderna determines the following information related to the patent:
Fair value 500,000
Expected future cash flows 680,000

Calculate amortization expense for 2022 and the 12/31/22 book value.

First conduct on an impairment test in early 2022:

Recoverability test:
Book value (carrying value) on 1/1/22 is 977,778, which is greater than expected cash flows of 680,000

Book Value 977,778

Fair Value 500,000
Impairment loss 477,778

Revised book value on 1/1/22 500,000

Amortization expense for 2022 62,500 500,000 / 8
Book Value on 12/31/22 437,500
an. 1, 2020.

12/31/21 book value.

cum. Amort. 100,000

00,000 + Legal costs on 1/1/20 of 200,000 / remaining useful life

to the patent:

flows of 680,000
Multiple Choice Practice Questions

Question 1
Which of the following does not describe intangible assets?
a) They lack physical existence.
b) They are financial instruments.
c) They provide long-term benefits.
d) They are classified as long-term assets.

Question 2
Assume that Pfizer incurred $80,000 of costs on April 1, 2020, related to researching
a new drug to prevent COVID-19. How should this cost be accounted for?
a) An expense on the income statement
b) An intangible asset on the balance sheet.
c) Some of the cost is an intangible asset on the balance sheet and the some of the
cost is an expense on the income statement.

Question 3
When the journal entry for amortization expense is recorded:
a) assets decrease
b) liabilities increase
c) net income increases
d) none of the above are correct

Question 4
For each of the following items, determine whether the cost should be capitalized or expensed:
1. Cost of engineering activity required in the design of a new product.
2. The legal cost incurred in successfully defending a copyright.
3. Cost of developing a patent.
4. Cost of purchasing a trademark.
d or expensed: