AC 210 Lecture Notes - Lecture 48: Fair Market Value, Intangible Asset
5 Jun 2018
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Intangible Assets
Intangible assets include patents, copyrights, trademarks, trade names, franchise
licenses, government licenses, goodwill, and other items that lack physical substance
but provide long‐term benefits to the company. Companies account for intangible assets
much as they account for depreciable assets and natural resources. The cost of
intangible assets is systematically allocated to expense during the asset's useful life or
legal life, whichever is shorter, and this life is never allowed to exceed forty years. The
process of allocating the cost of intangible assets to expense is called amortization, and
companies almost always use the straight‐line method to amortize intangible assets.
Patents. Patents provide exclusive rights to produce or sell new inventions. When a
patent is purchased from another company, the cost of the patent is the purchase price.
If a company invents a new product and receives a patent for it, the cost includes only
registration, documentation, and legal fees associated with acquiring the patent and
defending it against unlawful use by other companies. Research and development
costs, which are spent to improve existing products or create new ones, are never
included in the cost of a patent; such costs are recorded as operating expenses when
they are incurred because of the uncertainty surrounding the benefits they will provide.
The legal life of a patent is seventeen years, which often exceeds the patent's useful
life. Suppose a company buys an existing, five‐year‐old patent for $100,000. The
patent's remaining legal life is twelve years. If the company believes the patent's
remaining useful life is only ten years, they use the straight‐line method to calculate that
$10,000 ($100,000 ÷ 10 = $10,000) must be recorded as amortization expense each
year.
One way to record amortization expense of $10,000 is to debit amortization expense for
$10,000 and credit accumulated amortization‐patent for $10,000.
Instead of using a contra‐asset account to record accumulated amortization, most
companies decrease the balance of the intangible asset directly. In such cases,
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amortization expense of $10,000 is recorded by debiting amortization expense for
$10,000 and crediting the patent for $10,000.
A similar entry would be made to record amortization expense for each type of
intangible asset. The entry would include a debit to amortization expense and a credit to
the accumulated amortization or intangible asset account.
Copyrights. Companies amortize a variety of intangible assets, depending on the
nature of the business. Copyrights provide their owner with the exclusive right to
reproduce and sell artistic works, such as books, songs, or movies. The cost of
copyrights includes a nominal registration fee and any expenditures associated with
defending the copyright. If a copyright is purchased, the purchase price determines the
amortizable cost. Although the legal life of a copyright is extensive, copyrights are often
fully amortized within a relatively short period of time. The amortizable life of a
copyright, like other intangible assets, may never exceed forty years.
Trademarks and trade names. Trademarks and trade names include corporate
logos, advertising jingles, and product names that have been registered with the
government and serve to identify specific companies and products. All expenditures
associated with securing and defending trademarks and trade names are amortizable.
Franchise licenses. The purchaser of a franchise license receives the right to sell
certain products or services and to use certain trademarks or trade names. These rights
are valuable because they provide the purchaser with immediate customer recognition.
Many fast‐food restaurants, hotels, gas stations, and automobile dealerships are owned
by individuals who have paid a company for a franchise license. The cost of a franchise
license is amortized over its useful life, often its contractual life, which is not to exceed
forty years.
Government licenses. The purchaser of a government license receives the right to
engage in regulated business activities. For example, government licenses are required
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