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Chapter 8: 13DQ (page 386)

Question: What general procedures are applied in accounting for the acquisition and potential cost allocation of intangible assets?

Short Answer

Expert verified

The general procedures are applied in accounting for the acquisition and potential cost allocation of intangible assets: -

  1. If an intangible asset has a limited life
  2. If an intangible asset has an indefinite life

Step by step solution

01

Intangible assets

Assets with no physical substance give companies legal rights, privileges, or competitive advantages. Common intangibles are:

  • Patents and copyrights

  • Franchises and licenses

  • Trademarks and trade names

  • Goodwill

02

Cost allocation of intangible assets

Intangibles are separated into those with limited lives or indefinite lives.

If an intangible has a limited life, its cost is expensed over its estimated useful life through the process of amortization.

If an intangible asset has an indefinite life—meaning that no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life—it should not be amortized.

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Most popular questions from this chapter

Question: Ramirez Company installs a computerized manufacturing machine in its factory at the beginning of the year at a cost of \(43,500. The machine’s useful life is estimated at 10 years, or 385,000 units of product, with a \)5,000 salvage value. During its second year, the machine produces 32,500 units of product. Determine the machine’s second-year depreciation under the straight-line method.

Question: Does the balance in the accumulated depreciation- machinery account represent funds to replace the machinery when it wears out? If not, what does it represent?

Cala Manufacturing purchases a large lot on which an old building is located as part of its plans to build a new plant. The negotiated purchase price is \(280,000 for the lot plus \)110,000 for the old building. The company pays \(33,500 to tear down the old building and \)47,000 to fill and level the lot. It also pays a total of \(1,540,000 in construction costs—this amount consists of \)1,452,200 for the new building and $87,800 for lighting and paving a parking area next to the building. Prepare a single journal entry to record these costs incurred by Cala, all of which are paid in cash.

On February 19 of the current year, Quartzite Co. pays \(5,400,000 for land estimated to contain 4 million tons of recoverable ore. It installs machinery costing \)400,000 that has a 16-year life and no salvage value and is capable of mining the ore deposit in 12 years. The machinery is paid for on March 21, eleven days before mining operations begin. The company removes and sells 254,000 tons of ore during its first nine months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine’s depletion as the machinery will be abandoned after the ore is mined.

Required

Prepare entries to record (a) the purchase of the land, (b) the cost and installation of the machinery, (c) the first nine months’ depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first nine months’ depreciation on the machinery.

Analysis Component

Describe both the similarities and differences in amortization, depletion, and depreciation.

Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semi-annual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.)

Required

1. Identify decisions that managers like Choi must make in applying depreciation methods.

2. Is Choi’s rule an ethical violation, or is it a legitimate decision in computing depreciation?

3. How will Choi’s new depreciation rule affect the profit margin of her business?
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