Intangible Assets: Purchased –Patents, franchise, trademarks, copyrights, goodwill Self developed –Patents, trademarks, copyrights, software.

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Intangible Assets: Purchased –Patents, franchise, trademarks, copyrights, goodwill Self developed –Patents, trademarks, copyrights, software

Purchased Intangible Assets: Record at cost If no limited useful life (e.g., trademark, goodwill) –Maintain original cost –Evaluate periodically for impairment If impairment determined – write down

Problem 12 – 5 (b) Goodwill on 12/31/2003 should be A.$350,000 B.$200,000 C.$150,000 D.$ 50,000

Problem 12 – 5 (c) Goodwill on 12/31/2003 should be A.$350,000 B.$200,000 C.$150,000 D.$ 50,000

Purchased Intangible Assets: Record at cost If limited useful or legal life (patents, copyrights, e.g.) –Amortize, straight line, generally time based –Amortize over shorter of useful or legal life

Exercise 12 -9: The patent should be reported on the 2004 Balance sheet at A.$ 2,000,000 B.$ 1,600,000 C.$ 1,440,000 D.$1,200,000

Exercise 12 -9: The franchise should be reported on the 2004 Balance sheet at A.$ 480,000 B.$ 432,000 C.$ 400,000 D.$380,000

Exercise : Research and development expense for 2003 is A.$ 337,000 B.$ 427,000 C.$ 393,000 D.$ 707,000

Internally developed Intangibles Generally all costs expensed as R&D or other expenses (advertising, salaries, etc.) Exceptions: –Legal fees (register patent, defend patent) –Some costs for software developed for third party use

Software Developed for Third Party Use (FAS 86) Until technological feasibility is established all costs are expensed to R&D Once technological feasibility is established, costs are capitalized and subsequently amortized

Exercise Determine the amount at which the software should be reported on the balance sheet at December 31, 2004

Software Developed for Third Party Use (FAS 86) Amortization: Straight Line Either over time OR Proportionate to expected revenue, whichever is greater.

Software Developed for Third Party Use (FAS 86) Example: Capitalized cost: $300,000 Expected life 3 years Expected revenue$1,000,000 Year 1 revenue earned: 400,000 Amortization (years)$100,000 Revenue based: 400/1000 * 300 = $120 $120 > $100, Amortization: $120,000

Software Developed for Third Party Use (FAS 86) Software developed for external use must be reported at the lower of amortized cost or net realizable value. Once written down, may NOT be written up again.