Answer:
University Testing Services' (UTS) Amortization of Intangible Assets:
a) Identification of Intangible Assets:
1. On January 1, 2021, purchase of Heinrich Corporation for $3,510,000 cash with fair value of the net identifiable assets of $3,200,00. There are intangible assets valued $310,000 ($3,510,000 - $3,200,000).
These intangibles are made up of:
Patent - $82,250 valued for 7 sevens
Goodwill - $227,750 ($310,000 0 $82,250)
2. On July 1, 2021 acquisition of a Franchise for $333,000 for 9 years.
3. Calculations:
a) Amortization of Patent for 7 years, amortization expense for 2021 is $82,250/7 = $11,750
b) Amortization of Goodwill: There is no amortization of Goodwill. Companies are required to value their goodwill in the financial statements once a year to identify any impairment. See explanation of Goodwill.
c) Amortization of Franchise = $333,000/9 x 6/12 = $18,500
Solutions:
1. Recording Amortization Expense for the intangible assets at December 31, 2021:
Debit Patent Amortization Expense with $11,750
Credit Accumulated Patent Amortization with $11,750
To record amortization expense for the year.
Debit Franchise Amortization Expense with $18,850
Credit Accumulated Franchise Amortization with $18,850
To record amortization expense for 6 months.
2. The intangible assets section:
Goodwill (no impairment loss assessed) = $227,750
Patent - $82,250 less accumulated amortization - $11,750 = $70,500
Franchise - $333,000 less accumulated amortization - $18,500 = $314,500
Explanation:
Amortization is an accounting technique which tries to lower the value of an intangible asset over its useful life. It is treated like depreciation for tangible fixed assets.
Goodwill is the excess of the purchase price of another company over the value of its identifiable assets. Goodwill is an intangible asset, and includes the value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology, etc. GAAP requires that Goodwill which is expected to last forever is not treated like all the other intangible assets. While other intangible assets are amortized over their useful lives, Goodwill's value is assessed yearly to identify impairment or loss of value, which is then written off as impairment loss and accordingly, the Goodwill amount is re-stated based on the new value.
A franchise is a business license which allows the franchisee to use the franchisor's proprietary knowledge, processes, and trademarks to sell a product or provide a service under the franchisor's name. It is an intangible asset.
Intangible assets are those non-current assets that are not tangible like land and building, etc.
