ACCO 211 Activity 52 1. Intangible assets have two main characteristics (1) they

Question

ACCO 211 Activity 52 1. Intangible assets have two main characteristics (1) they lack physical existence, and (2) they are not financial instruments Instructions (a) Explain why intangibles are classified as assets d they have no physical existence. (b) Explain why intangibles are not considered financial instruments 2. Under what circumstances is it appropriate to record goodwill in the accounts? How should goodwill, properly recorded on the books, be written off in accordance with generally accepted accounting principles? 3. Why does the accounting profession make a distinction betwoon internally created intangible assets and purchased intangible assets? 4. What are factors to be considered in estimating the uselul Ide of an intangible asset? 5. A high-speed multiple-bit drill press costing $060,000 has an estmated salvage value of $80,000 and a life of ten years was purchased on April 20 of the current year. What is the annual depreciation for each of the first two years undor the following depreciation methods? Year one, $ b. Year two, 2 Units of production (aclivity) method (letme output is estimated at 110,000 units, the press produced 12,000 unts in year one and 18,000 in year two) a Year one, S 3 Straight-äne depreciation method a Year one, $ a Year b. Year two,

Explanation / Answer

1 (a) Assets are the valuable thing owned by the business.The assets are further divided as fixed assets, current assets, tangible assets, intangible assets. Now intangible assets are those assets which we cannot see and touch or say do not have physical existence. They can be bought and sold not in general but in special circumstance the best example is goodwill. Goodwill may help to maintain the company's reputation in future. In the same way they are basically the economic resource of the company therefore despite not having physical existence they are considered as assets.

(b) Financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. An asset or liability that is not contractual (e.g., an obligation to pay income taxes) is not a financial instrument even though it may result in the receipt or delivery of cash. The term “financial instrument” encompasses equity instruments, financial assets, and financial liabilities. Both intangible assets and financial instruments are governed by different accounting standards which describes specific treatment of accounting of both differently.

2. In mergers and acquisitions, a company that purchases another is referred to as the acquiring company. The company that is acquired is the target company. The value of goodwill typically arises in an acquisition when a target company is purchased by an acquirer. The amount the acquiring company pays for the target company over the target’s book value usually accounts for the value of the target’s goodwill. If the acquiring company pays less than the target’s book value, it gains “negative goodwill,” meaning that it purchased the company at a bargain in a distress sale.
Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), companies are required to evaluate the value of goodwill on their financial statements at least once a year, and record any impairments. An impairment of an asset occurs when the market value of the asset drops below historical cost. This can occur when an adverse event, such as declining cash flows, increased competitive environment, economy depression, etc. occurs. Companies assess whether an impairment is needed by performing an impairment test on the intangible asset. The two commonly used methods for testing impairments are the income approach and the market approach. Using the income approach, estimated future cash flows are discounted to the present value. With the market approach, the assets and liabilities of similar companies operating in the same industry are analyzed.

3. In some cases, expenditure is incurred to generate future economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria in this Standard. Such expenditure is often described as contributing to internally generated goodwill. Internally generated goodwill is not recognised as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost.

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