AccY2-ch04-Vives23

Chapter 4: Other Noncurrent Assets

Intangible Assets

• Noncurrent assets without physical substance.

• Useful life is often difficult to determine.

• Usually acquired for operational use.

• Provide exclusive rights or privileges.

Types of Intangible Assets

• Definite Life: Amortizable over the shorter of economic life or legal life, following GAAP rules.

  • Use straight-line method.

  • Amortization is similar to depreciation and depletion.

• Common Intangible Assets Include:

  • Organization costs

  • Goodwill

  • Franchises

  • Trademarks and trade names

  • Patents

  • Copyrights

  • Preopening expenses

  • Liquor licenses

Recording Intangible Assets

• Recorded at current cash equivalent cost, including:

  • Purchase price

  • Legal fees

  • Filing fees

Amortization of Intangibles

• Journal Entry Example:

  • Amortization Expense xxx

  • Intangible asset xxx

Organization Costs

• Costs associated with forming a corporation, including:

  • Fees for underwriters

  • Legal fees

  • Promotional expenditures

• Amortization not to exceed 40 years but at least 5 years for tax purposes.

• Example: Total organization costs = $6,000; minimum amortization life = 5 years.

  • Journal Entry (monthly):

    • Organization costs 6,000

    • Cash 6,000

    • Amortization Expense 100

    • Organization costs 100

Goodwill

• Occurs when one company purchases another.

• Recorded as the amount by which the purchase price exceeds the fair market value of net assets acquired.

• Only purchased goodwill is considered an intangible asset.

Goodwill Example

• Arpec Company paid $2,000,000 to purchase all of Utek Company's assets (liabilities of $400,000).

• Acquired assets appraised at a fair value of $1,800,000.

• Goodwill Calculation:

  • Goodwill = Purchase price - Fair value of net assets.

Franchise

• A contractual agreement where:

  • The franchisor gives the franchisee the right to sell products/services or use trademarks/trade names within a certain area.

• Legally protected right, typically for a limited period (maximum 40 years).

• Cost amortized over the franchise term; annual payments are expensed.

Advantages of Franchising

• Proven successful business model.

• Training and management support provided.

• Marketing and product placement controlled by franchisor.

• Less risky than starting/acquiring a new business.

Disadvantages of Franchising

• Control over marketing and operations given up.

• Policies set by franchisor.

• Must purchase from specific vendors.

• Regular inspections required; success depends on franchisor’s performance.

Trademarks and Trade Names

• Word, phrase, or symbol identifying a business or product (e.g., Kleenex, Windows).

• Legal protection for indefinite periods (renewable every 10 years).

• Acquisition costs capitalized; no amortization required.

Patents

• Exclusive rights granted to sell or manufacture an invention.

• Costs include purchase price and legal costs.

• Amortization period: shorter of useful life or 17 years.

Copyrights

• Protects artistic/intellectual properties.

• Amortization period: life of creator + 50 years.

Preopening Expenses

• Costs incurred before a company starts operations:

  • Training costs

  • Executive salaries

  • Advertising

  • Market studies

  • Travel costs

  • Consultation fees

Liquor Licenses

• Exclusive right to sell alcohol; renewal fees expensed.

• Amortization period: maximum of 40 years.

Cash Value Intangible Assets

• Includes future sources of cash, security deposits, and life insurance cash surrender value.

Security Deposits

• Non-amortized assets; may not be collected in case of damage.

Cash Surrender Value of Life Insurance

• Life insurance policies on key personnel.

• Whole-life policies have cash surrender values; term policies are treated as expenses.