Question

The following is a list of items that could be included in the intangible assets section of the balance sheet.

1. Investment in a subsidiary company.

2. Timberland.

3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.

4. Lease prepayment (6 months’ rent paid in advance).

5. Cost of equipment obtained.

6. Cost of searching for applications of new research findings.

7. Costs incurred in the formation of a corporation.

8. Operating losses incurred in the start-up of a business.

9. Training costs incurred in start-up of new operation.

10. Purchase cost of a franchise.

11. Goodwill generated internally.

12. Cost of testing in search for product alternatives.

13. Goodwill acquired in the purchase of a business.

14. Cost of developing a patent.

15. Cost of purchasing a patent from an inventor.

16. Legal costs incurred in securing a patent.

17. Unrecovered costs of a successful legal suit to protect the patent.

18. Cost of conceptual formulation of possible product alternatives.

19. Cost of purchasing a copyright.

20. Research and development costs.

21. Long-term receivables.

22. Cost of developing a trademark.

23. Cost of purchasing a trademark.

Instructions:

(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.

(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

Short answer

Answer

An identified non-monetary item with no physical substance is known as an intangible asset. When an asset is separable or comes from contractual or other legal rights, it is identifiable.

Step-by-step solution

Classification

Particulars	Intangible/Non-Intangible
Investment in a subsidiary company.	Not an intangible asset
Timberland.	Not an intangible asset
Cost of engineering activity required to advance the design of a product to the manufacturing stage.	Not an intangible asset
Lease prepayment (6 months’ rent paid in advance).	Not an intangible asset
Cost of equipment obtained.	Not an intangible asset
Cost of searching for applications of new research findings.	Not an intangible asset
Costs incurred in the formation of a corporation.	Not an intangible asset
Operating losses incurred in the start-up of a business.	Not an intangible asset
Training costs incurred in start-up of new operation.	Not an intangible asset
Purchase cost of a franchise.	Intangible asset

Goodwill generated internally.	Not an intangible asset
Cost of testing in search for product alternatives.	Not an intangible asset
Goodwill acquired in the purchase of a business.	Intangible asset
Cost of developing a patent.	Not an intangible asset
Cost of purchasing a patent from an inventor.	Intangible asset
Legal costs incurred in securing a patent.	Intangible asset
Unrecovered costs of a successful legal suit to protect the patent.	Intangible asset
Cost of conceptual formulation of possible product alternatives.	Not an intangible asset
Cost of purchasing a copyright.	Intangible asset
Research and development costs.	Not an intangible asset
Long-term receivables.	Not an intangible asset
Cost of developing a trademark.	Not an intangible asset
Cost of purchasing a trademark.	Intangible asset

How the items not reportable as intangible assets would be reported in the financial statements. 

Particulars	How to report in financial statements
Investment in a subsidiary company.	Long-term Investments in the balance sheet.
Timberland.	Property, plant, and equipments in the balance sheet.
Cost of engineering activity required to advance the design of a product to the manufacturing stage.	Research and Development expense in the income statement.
Lease prepayment (6 months’ rent paid in advance).	Current asset (prepaid rent) in the balance sheet.
Cost of equipment obtained.	Property, plant, and equipments in the balance sheet.
Cost of searching for applications of new research findings.	Research and development expense in the income statement.
Costs incurred in the formation of a corporation.	Charge as expense in the income statement.
Operating losses incurred in the start-up of a business.	Operating losses in the income statement.
Training costs incurred in start-up of new operation.	Charge as expense in the income statement.
Goodwill generated internally.	Not recorded; any costs related to creating goodwill incurred internally must be expensed.
Cost of testing in search for product alternatives.	Research and development expense in the income statement.
Cost of developing a patent.	Research and development expense in the income statement.
Cost of conceptual formulation of possible product alternatives.	Research and development expense in the income statement.
Research and development costs.	Research and development expense in the income statement.
Long-term receivables.	Long-term Investments, or other assets, in the balance sheet.
Cost of developing a trademark.	Expensed in the income statement.