Amortization

INTANGIBLE ASSETS

Not physical in nature

Patents
Copyrights
Trademarks
Franchises
Leaseholds
Goodwill
INTANGIBLE ASSETS: PATENTS
Patents are federal government grants.
They give the holder the right to produce and sell an invention.
Suppose a company pays $170,000 to acquire a patent on January 1.
The company believes that its expected useful life is 5 years.
What are the entries?
INTANGIBLE ASSETS: PATENTS
Jan. 1
Patents 170,000
Cash 170,000
To acquire a patent

Dec. 31
Amortization Expense 34,000
Patents 34,000
To amortize the cost of a patent
INTANGIBLE ASSETS: COPYRIGHTS

Literary compositions (novels)

Musical compositions
Films (movies)
Software
Other works of art
INTANGIBLE ASSETS: TRADEMARKS

Trademarks, Trade Names,

or Brand Names are assets that represent
distinctive identifications of a product or
service.
INTANGIBLE ASSETS: FRANCHISES
Franchises are privileges granted by private business or government
to sell a product or service.
INTANGIBLE ASSETS: GOODWILL
Goodwill is defined as the excess of purchase price over the fair
value of the net assets acquired.
Goodwill can only be recorded in the purchase of another company.
Goodwill is no longer amortized
Goodwill is now subject to an “impairment” test.
 INTANGIBLE ASSETS: GOODWILL
Goodwill Example
Purchase price paid for
Mexana Company $10 million
Assets at market value 9 million
Less Mexana’s liabilities 1 million
Market value of
Mexana’s net assets 8 million
Goodwill $ 2 million