Accounting Chapter 7

Ways Companies Acquire Intangible Assets

1. They purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other entities. -We record purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use. 2. They create intangible assets internally by developing a new product or process and obtaining a protective patent. -We expense to the income statement most of the costs for internally developed intangible assets as we incur those costs. ***R&D costs are not recorded as intangible asset in balance sheet. They are expensed directly in income statement. ***Advertising costs are also recorded as expenses on income statement. Both are because it is impossible to determine how much benefit they add in future periods.

Trademarks

A word, slogan, or symbol that distinctively identifies a company, product, or service. -Firm can register its trademark with US Patent and Trademark office to protect it from use by others for a period of 10 years. -Registration can be renewed for an indefinite number of 10-year periods (useful life is indefinite). -Firms often acquire trademarks through acquisition. -Advertising costs can factor into the cost of a trademark in a big way. A firm expenses the advertising costs in the income statement due to inability to calculate future benefits. -Firm can record attorney fees, registration fees, design costs, successful legal defense, and other costs as intangible assets in Trademark asset account.

Copyrights

An exclusive right of protection given to the creator of a published work, such as a song, film, painting, photo, book, or computer software. -Given by US Copyright Office -Protected by law for the life of the creator plus 70 years. -Allows the holder to pursue legal action against anyone who attempts to infringe.

Patent

An exclusive right to manufacture a product or to use a process. -US Patent and Trademark Office grants this right for a period of 20 years. -When a firm purchases a patent, it records the patent as its purchase price plus such other costs such as legal and filing fees to secure the patent. -When firm develops patent internally, it expenses the R&D costs as it incurs them. -Costs of successfully defending a patent, including attorneys' fees, are added to patent account.

Intangible Assets

Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. -They are distinguished from tangible assets because they lack physical substance. -Evidence of their existence is often based on legal contracts.

Tangible Assets

Assets in this category include property, land, land improvements, buildings, equipment, and natural resources.

Natural Resources

Assets like oil, natural gas, and timber that we can physically use up or deplete. -Primary concern is sustainability.

Land Improvements

Improvements to and such as paving, lighting, and landscaping that, unlike the land itself, are subject to depreciation. -Land improvements do depreciate

Buildings

Include administrative offices, retail stores, manufacturing facilities, and storage warehouses.

Equipment

Includes machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures. -Cost of equipment is the actual purchase price plus all other costs necessary to prepare the asset for use. -We expense recurring costs (annual insurance or tax) as we incur them rather than including them in cost of equipment.

Franchise

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area. -Many franchisors provide other benefits to the franchisee, such as participating in construction of the retail outlet, training employees, and purchasing national ads. -Franchisee records the initial fee as an intangible asset and then expenses that cost over the life of the franchise agreement.

Basket Purchase

Purchase of more than one asset at the same time for one purchase price. -If land, building, and equipment are purchased together for one price, we allocate the total purchase price based on the estimated fair values of each of the individual assets. -Estimated fair values of the individual assets often exceed the total purchase price. ***In this case we divide the individual fair purchase prices from the total fair purchase price, receive a percentage, then multiply the percentage by the purchase price.

Capitalized Interest

Refers to interest costs we add to the asset account rather than recording them as interest expense. -Interest paid to borrow funds is part of asset's cost because it is necessary in preparing the asset for use (consistent with matching principle).

Land

The land account represents land a company is using in its operations -We capitalize to Land all expenditures necessary to get the land ready for its intended use. -If we receive any cash from selling salvaged materials from old buildings torn down, we reduce the cost of Land by that amount. -Land is an asset that we do not depreciate because its life is indefinite.

Goodwill

The value of the company as a whole, over and above the value of its identifiable net assets. Goodwill equals the purchase price less the fair value of the net assets acquired. -Often largest intangible asset recorded in balance sheet. -Cannot be separated from the company and sold separately. -Value can emerge from a company's reputation, its trained employees and management team, its favorable business location, and any other unique features of the company that we are unable to associate with specific asset. -We record goodwill as an intangible asset in the balance sheet ONLY when we purchase it as part of acquisition of another company. -Fair value of net assets is equal to the value of all identifiable assets acquired, minus the value of all liabilities assumed.

Capitalize

To record an expenditure as an asset.

General Rule for Recording Long-Term Assets

We record all long-term asset at its cost PLUS all expenditures necessary to get the asset ready for use. -Thus, initial cost of a long-term asset may be more than just purchase price.