Intermediate Accounting II

Amortization

1. The paying off of debt in regular installments over a period of time. 2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.

Franchises

A contractual arrangement under which a Franchisor grants the franchisee the exclusive right or use of the Franchisor's trademark or trade name and certain product rights. Cost that is capitalized for a franchise includes the franchise fee plus any legal fees. Amortized over life of the franchise agreement.

Goodwill (2)

Difficult to quantify and not recorded on company's balance sheet. Journal Entry: Debit Assets Acquired....................$$ Debit Goodwill................................$$ Credit Liabilities Incurred...................$$ Credit Cash Paid...............................$$ Not Amortized; indefinite life.

Patents

Exclusive 20-year right to manufacture a product or use a process. Costs that are capitalized for a patent include the Purchase Price, Filing Fees, Legal Fees, but not internal research and development. Amortized over a period of 20 years from application filing date. Life of Patent may be extended in certain circumstances. Required to be registered; unlike copyrights.

Copyrights

Exclusive right to benefit from a creative work. Author's life + 70 years. Costs that are capitalized for a copyright include the Purchase Price and Filing Fees, not including internal research and development costs. Amortized for a period of the author's life + 70 years. Protected within their own country, but not internationally.

Trademarks or Service Marks

Exclusive right to display a work, slogan, symbol or emblem that distinctively identifies a company, product or a service. Costs include Purchase Price, Legal Fees, Filing Fees, but not internal research and development. Not amortized; indefinite life. Must be registered with U.S. Patent & Trademark Office

Research and Development Costs

Expensed on Income statement as incurred and disclosed in the footnotes of financial statements Expensed due to their high uncertainty as to their future benefits. Research: Planned search or investigation aimed at discovering new knowledge with hopes that new knowledge will be useful in developing a new product or service, or significant improvement to an existing product or process. Development: Translation of research findings into a plan or design for a new product or process or a significant improvement to existing products; whether for sale or use. (formulation, design, prototypes...) Does not include routine or periodic alterations or market research or market testing activities.

Software Development Costs

Expensed only until they reach the point of technological feasibility. Technological Feasibility Established when: Complete with Planning, Designing, Coding, and Testing activities that are necessary to establish that the product can be produced to meet all technical performance requirements.

Tangible Assets

Include Property, Plant, and Equipment.k

Intangible Assets

Lack physical substance. Include Patents, Copyrights, Trademarks, Trade names, Trade secrets, Franchises and Goodwill. Future benefits is more uncertain. Can be quite valuable to a company.

Goodwill

Unique value of the company as a whole over and above all identifiable assets. Recorded through acquisition of another company. Goodwill of company earned as result of reputation in community, customer base, employees, etc.