1. A machine that cost $740,000 has an estimated residual value of $20,000 and a
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Question
1. A machine that cost $740,000 has an estimated residual value of $20,000 and an estimated useful life of eight years. The company uses straight-line depreciation. Calculate its book value at the end of year 7.
Bluestone Company had three intangible assets at the end of the current year:
A patent purchased this year from Miller Co. on January 1 for a cash cost of $3,600. When purchased, the patent had an estimated life of 12 years.
A trademark was registered with the federal government for $8,000. Management estimated that the trademark could be worth as much as $200,000 because it has an indefinite life.
Computer licensing rights were purchased this year on January 1 for $90,000. The rights are expected to have a six-year useful life to the company.
Compute the acquisition cost of each intangible asset.
Compute the amortization of each intangible for the current year ended December 31.
Show how these assets and any related expenses should be reported on the balance sheet and income statement for the current year.
a.A patent purchased this year from Miller Co. on January 1 for a cash cost of $3,600. When purchased, the patent had an estimated life of 12 years.
b.A trademark was registered with the federal government for $8,000. Management estimated that the trademark could be worth as much as $200,000 because it has an indefinite life.
c.Computer licensing rights were purchased this year on January 1 for $90,000. The rights are expected to have a six-year useful life to the company.
Explanation / Answer
1) Depreciation per year = ($740000 - $20000) / 8 = $90000
Depreciation for 7 years = 7 * $90000 = $630000
Book value at the end of the 7 years = $740000 - $630000 = $110000
2)
Cost of acquisition of the intangible assets:
Patent = $3600, that is the cost of acquisition
Trade Mark = no cost of acquisition as it has not been acquired or purchased by the company.
Computer Licensing Rights = $90000, cost of purchasing the license
Amortization:
The intangible assets with definite economic life will be amortized suing a method suitable to the use of the asset. In absence of any such information, the assets should be amortized over the useful life of the asset.
The intangible assets with indefinite life are not amortized and they are impaired whenever such impairment of the value takes place. The company estimates the fair value of such assets every year and decides whether it should be impaired or not. As there is no information regarding the fair value at the end of the year for the trade mark, no impairment has been done for the year in question.
For patent
Amortization
= (cost of acquisition – salvage value)/ economic life in number of year
= ($3600 – 0) / 12 = $300
Amortization of Computer License
= (cost of acquisition – salvage value)/ economic life in number of year
= ($90000 – 0) / 6 = $15000
The intangible assets will be reported in the balance sheet as follows:
Balance sheet (partial) as on 31st Dec. 20XX
ASSETS
Intangible Assets:
Patent $3300
Trade Mark $200000
Computer License $75000
$278300
Note: for intangible assets the contra accounts (amortization or impairment loss) are not usually shown in the balance sheet.
Income statement (partial) for the year ended 31 Dec 20XX
Amortization:
Patent $300
Computer license $15000
$15300
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