Question

On the first day of 2016, Holthausen COmpany acquired the assets of Leftwich Company including several intangible assests. These include a patent on Ledtwicj's primary product, a device called a plentiscope. Leftwich carried the patent on its book for $1,500, but Holthausen believes that the fair value is $200,000. The patent expires in seven years, but companies can be expected to develop competing patents within three years. Holthausen believes that, with expected technlogical improvements, the product is marketable for a t least 20 years.
The registration of the trademark for the Leftwich name is scheduled to expire in 15 years. However, the Leftwich brand name, which Holthausen believes is worth $500,000, could be applied to related products for many years beyond that.
As part of the acquisition, Leftwich's principal researcher left the company. As part of the acquisition, he signed a five-year noncompetition agreement that prevents him from developing competing products. Holthausen paid the scientist $300,000 to sign the agreement.
a. What amount should be capitalized for each of teh identifiable intangible assets?
b. What amount of amortization expense should Holthausen record in 2016 for each asset?

Answer 1

Answer:

Holthausen Company and Leftwich Company

Intangible Assets:

a) Amount to be capitalized:

1) Patent: $200,000

2) Trademark: $500,000

3) Non-competition Agreement: $300,000

b) Amount of Amortization Expense for 2016:

1) Patent: $200,000/7 years = $28,571.43

2) Trademark: $500,000/15 years = $33,333,33

3) Non-competition Agreement: $300,000/5 = $60,000

Explanation:

The fair values of the "plentiscope" patent and Leftwich's branded trademark should be capitalized as intangible assets, while the cost of the non-competition agreement with Leftwich's principal researcher should be capitalized.

For the amortization of the Leftwich-connected intangibles, we have adopted the straight-line method, in the absence of any prescribed method.  The patent expiration in 7 years was used as the basis for its useful life, despite Holthausen belief that the product could be marketable for at least 20 years.

The trademark was amortized over its remaining useful life of 15 years as given, while the non-competition agreement was amortized for 5 years when the agreement remains effective.