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Chapter12-1
C H A P T E RC H A P T E R 1212
I N T A N G I B L E A S S E T SI N T A N G I B L E A S S E T S
Intermediate Accounting
13th EditionKieso, Weygandt, and Warfield
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Chapter12-2
Intangible Asset IssuesIntangible Asset Issues
Intangible Asset IssuesIntangible Asset Issues
LO 1 Describe the characteristics of intangible assets.LO 1 Describe the characteristics of intangible assets.
Two Main Characteristics:
Characteristics
(1) They lack physical existence.
(2) They are not financial instruments.
Normally classified as lon!term asset.
Common types of intani"les:
#atentsCopyrihts
$ranchises or licenses
Trademarks or trade names%oodwill
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Chapter12-3
Intangible Asset IssuesIntangible Asset Issues
Intangible Asset IssuesIntangible Asset Issues
LO 2 Identify the costs to include in the initial valuation of intangible assets.LO 2 Identify the costs to include in the initial valuation of intangible assets.
Purchased &ntani"les:
'ecorded at cost.
&ncludes all costs necessary to make the intani"leasset ready for its intended use.
Valuation
Internally Created&ntani"les:
%enerally expensed.nly capitalie direct costs incurred in de*elopin theintani"le+ such as leal costs.
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Chapter12-4
Intangible Asset IssuesIntangible Asset Issues
Intangible Asset IssuesIntangible Asset Issues
LO 3 !"lain the "rocedure for a#orti$ing intangible assets.LO 3 !"lain the "rocedure for a#orti$ing intangible assets.
A#orti$ation of IntangiblesLi#ited%Life&ntani"les:
,mortie to expense.
Credit asset account or accumulated amortiation.
Indefinite%Life&ntani"les:
No foreseea"le limit on time the asset is expected to
pro*ide cash flows.No amortiation.
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Chapter12-5
Intangible Asset IssuesIntangible Asset Issues
Intangible Asset IssuesIntangible Asset Issues
LO 3 !"lain the "rocedure for a#orti$ing intangible assets.LO 3 !"lain the "rocedure for a#orti$ing intangible assets.
Accounting for IntangiblesIllustratio 12-1
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Chapter12-!
&y"es of Intangibles&y"es of Intangibles
&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
(i! )a*or Categories+(1) Marketin!related.
(2) Customer!related.
(-) ,rtistic!related.
() Contract!related.
(/) Technoloy!related.
(0) %oodwill.
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Chapter12-"
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
)ar,eting%-elated Intangible Assetsxamplesare:
trademarks or trade names+ newspaper
mastheads+ &nternet domain names+ andnoncompetition areements.
Trademarkor trade namehas leal protection forindefinite num"er of 1 year renewal periods.
Capitalie ac3uisition costs.
No amortiation.
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Chapter12-$
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
Illustration+ ,ssume that %reen Market &nc. ac3uires thecustomer list of a lare newspaper for 40++ on5anuary 1+ 21. %reen Market expects to "enefitfrom the information e*enly o*er a three!year period.
'ecord the purchase of the customer list and theamortiation of the customer list at the end of eachyear.
Customer 6ist 0++5an. 1
Cash 0++
Customer list expense 2++7ec. -1
21211212
Customer list 2++
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Chapter12-1%
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
Artistic%-elated Intangible Assetsxamplesare:
plays+ literary works+ musical works+ pictures+
photoraphs+ and *ideo and audio*isual material.Copyrihtis ranted for the life of the creator plus8 years.
Capitalie ac3uisition costs.
,mortied to expense o*er useful life.
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Chapter12-11
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
Contract%-elated Intangible Assetsxamplesare:
franchise and licensin areements+ construction
permits+ "roadcast rihts+ and ser*ice or supplycontracts.
$ranchise(or license) with a limited life should "eamortied to expense o*er the life of the franchise.
$ranchise with an indefinite life should "e carried atcost and not amortied.
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Chapter12-12
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
&echnology%-elated Intangible Assetsxamplesare:
patented technoloy and trade secrets ranted
"y the 9.. #atent and Trademark ffice.#atenti*es the holder exclusi*e use for a period of2 years.
Capitalie costs of purchasin a patent.
xpense any ';7 costs in de*elopin a patent.
6eal fees incurred successfully defendin a patentare capitalied to #atent account.
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Chapter12-13
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO ' Describe the ty"es of intangible assets.LO ' Describe the ty"es of intangible assets.
Illustration+ s useful life is 2 years+ amortied on a straiht!line "asis.
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Chapter12-14
&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles&y"es of Intangibles
LO !"lain the conce"tual issues related to good/ill.LO !"lain the conce"tual issues related to good/ill.
0ood/illnly recorded when an entire "usiness is purchased"ecause oodwill cannot "e separated from the"usiness as a whole.
%oodwill is recorded as the excess of ...
purchase price o*ero*erthe $M@ of the identifia"lenet assets ac3uired.
&nternally created oodwill should not "e capitalied.
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Chapter12-15
Illustration+ Multi!7i*ersified+ &nc. decides that it needs aparts di*ision to supplement its existin tractordistri"utorship. The president of Multi!7i*ersified isinterested in "uyin Tractorlin Company+ a small concern in
Chicao. &llustration 12!- presents the "alance sheet ofTractorlin Company.
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
Illustratio 12-3
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Chapter12-1!
Illustration+ Multi!7i*ersified in*estiates Tractorlin>sunderlyin assets to determine their fair *alues.
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
Illustratio 12-4
Tractorlin Company decides to accept Multi!7i*ersified>soffer of 4+. Ahat is the *alue of the oodwill+ if anyB
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Chapter12-1"
Illustration+ 7etermination of %oodwill.
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
Illustratio 12-5
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Chapter12-1#
Illustration+ Multi!7i*ersified records this transaction asfollows.
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
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Chapter12-1$
!a#"le+%lo"al Corporation purchased the net assets of 6ocalCompany for 4-+ on 7ecem"er -1+ 21. The "alance sheetof 6ocal Company ust prior to ac3uisition is:
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
Assets Cost )V
Cash 1.4445 1.4445
-eceivables 14444 14444Inventories .4444 64444
7ui"#ent 84444 134444
&otal 1..4445 22.4445
Liabilities and 7uitiesAccounts "ayable 2.4445 2.4445
Co##on stoc, 144444
-etained earnings 34444
&otal 1..4445 2.4445
)V of)V of9et Assets9et Assets
: 5244444: 5244444
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Chapter12-2% LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
;oo, Value : 5134444
air Value : 5244444
Purchase Price : 5344444
-evaluation564444
0ood/ill5144444
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
!a#"le+%lo"al Corporation purchased the net assets of 6ocalCompany for 4-+ on 7ecem"er -1+ 21. The *alue assinedto oodwill is determined as follows:
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Chapter12-21
!a#"le+%lo"al Corporation purchased the net assets of 6ocalCompany for 4-+ on 7ecem"er -1+ 21. The *alue assinedto oodwill is determined as follows:
-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill-ecording 0ood/ill
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
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Chapter12-23
0ood/ill0ood/ill0ood/ill0ood/ill
0ood/ill =rite%off%oodwill considered to ha*e an indefinite life.
hould not"e amortied.
nly adust carryin *alue when oodwill isimpaired.
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
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Chapter12-24
0ood/ill0ood/ill0ood/ill0ood/ill
;argain Purchase#urchase price less thanthe fair *alue of netassets ac3uired.
,mount is recorded as a gain"y the purchaser.
LO Describe the accounting "rocedures for recording good/ill.LO Describe the accounting "rocedures for recording good/ill.
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Chapter12-25
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
I#"air#ent of Li#ited%Life Intangibles
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
ame as impairment for lon!li*ed assets in Chapter 11.
1. &f the sum of the expected future net cash flows is less
thanthe carryin amount of the asset+ an impairmenthas occurred (reco*era"ility test).
2. The impairment loss is the amount "y which the carryinamount of the asset exceeds the fair *alue of the asset
(fair *alue test).The loss is reported as part of income from continuinoperations+ Dther expenses and lossesE section.
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Chapter12-2!
12%1'+ (Copyriht &mpairment) #resented "elow is informationrelated to copyrihts owned "y Fotticelli Company at 7ecem"er-1+ 21.
Cost =+0+4
Carryin amount .+-+
1xpected future net cash flows .++$air *alue -+2+
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
The copyriht has a remainin useful life of 1 years.
(a) #repare the ournal entry (if any) to record the impairment ofthe asset at 7ecem"er -1+ 21.
(") #repare the ournal entry to record amortiation expense for211 related to the copyrihts.
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Chapter12-2#
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
(a) #repare the ournal entry (if any) to record theimpairment of the asset at 7ecem"er -1+ 21.
air value test+
Carryin amount .+-+4$air *alue -+2+
6oss on impairment (1+1+)4
6oss on impairment 1+1+
Copyrihts 1+1+
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Chapter12-2$
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
(") #repare the ournal entry to record amortiation expensefor 211 related to the copyrihts.
>>
,mortiation expense -2+
Copyrihts -2+
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Chapter
12-31
Illustratio 12-"
Illustration+ ,rcon 'adio purchased a "roadcast license for42++. ,rcon 'adio has renewed the license with the $CCtwice+ at a minimal cost. Fecause it expects cash flows to lastindefinitely+ ,rcon reports the license as an indefinite!lifeintani"le asset. 'ecently the $CC decided to auction these
licenses to the hihest "idder instead of renewin them. ,rcon'adio expects cash flows for the remainin two years of itsexistin license. &t performs an impairment test and determinesthat the fair *alue of the intani"le asset is 41+/+.
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
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Chapter
12-32
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
I#"air#ent of 0ood/ill
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
Two tep #rocess:
tep 1: &f fair *alue is less thanthe carryin amount of
the net assets (includin oodwill)+ then performa second step to determine possi"le impairment.
tep 2:7etermine the fair *alue of the oodwill (implied*alue of oodwill) and compare to carryin
amount.
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Chapter
12-33
12%1.+ (%oodwill &mpairment) #resented "elow is net assetinformation related to the Mischa 7i*ision of antana+ &nc. as of7ecem"er -1+ 21 (in millions):
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
Manaement estimated its future net cash flows from the di*isionto "e 4 million. Manaement has also recei*ed an offer topurchase the di*ision for 4--/ million. ,ll identifia"le assets> andlia"ilities> "ook and fair *alue amounts are the same.
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Chapter
12-34
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
12%1. Instructions(a) #repare the ournal entry (if any) to record the
impairment at 7ecem"er -1+ 21.
tep 1:The fair
*alue of thereportin unit is"elow its carryin*alue. Therefore+ animpairment has
occurred.
tep 2:
6oss on impairment 2/++
%oodwill 2/++
4 --/4 --/1010
18/18/
22
4 (2/)4 (2/)
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Chapter
12-35
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
12%1. Instructions(") ,t 7ecem"er -1+ 211+ it is estimated that the di*ision>s
fair *alue increased to 4-/ million. #repare the ournalentry (if any) to record this increase in fair *alue.
No entry necessary.
,dusted carryin amount of the oodwill is its newaccountin "asis.
u"se3uent re*ersal of reconied impairment lossesis not permitted under $, No. 12.
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Chapter
12-3!
I#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible AssetsI#"air#ent of Intangible Assets
LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.LO 6 !"lain the accounting issues related to intangible%asset i#"air#ents.
(u##ary of I#"air#ent &ests
Illustratio 12-11
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Chapter
12-3"
-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs
LO 8 Identify the conce"tual issues related to research and develo"#ent costs.LO 8 Identify the conce"tual issues related to research and develo"#ent costs.
$re3uently results in somethin that a companypatents or copyrihts such as:
new product+
process+idea+
formula+
composition+ orliterary work.
Fecause of difficulties related to identifyin costs
with particular acti*ities and determinin the future"enefits+ all ' ; 7 costs are e!"ensed /hen incurred.
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Chapter
12-3#
Identifying - ? D Activities
-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs
LO 8 Identify the conce"tual issues related to research and develo"#ent costs.LO 8 Identify the conce"tual issues related to research and develo"#ent costs.
-esearch Activities
#lanned search or criticalin*estiation aimed at disco*eryof new knowlede.
-esearch Activities
#lanned search or criticalin*estiation aimed at disco*eryof new knowlede.
xamples6a"oratory research aimed atdisco*ery of new knowledeG searchinfor applications of new research
findins.
xamples6a"oratory research aimed atdisco*ery of new knowledeG searchinfor applications of new research
findins.
Develo"#ent Activities
Translation of research findinsor other knowlede into a plan or
desin for a new product orprocess or for a sinificantimpro*ement to an existinproduct or process whetherintended for sale or use.
xamples
Conceptual formulation and desin ofpossi"le product or process
alternati*esG construction ofprototypes and operation of pilotplants.
Illustratio 12-13
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Chapter
12-4%
Cost of e3uipment ac3uired that will ha*e alternati*e
uses in future ';7 proects o*er the next / years.Materials consumed in ';7 proects
Consultin fees paid to outsiders for ';7 proects
#ersonnel costs of persons in*ol*ed in ';7 proects&ndirect costs reasona"ly alloca"le to ';7 proects
Materials purchased for future ';7 proects
42=+/?+
1+
12=+/+
-+
4/0+/?+
1+
12=+/+
';7';7xpensexpense
4-?-+
42=+ H / I 4/0+42=+ H / I 4/0+
-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs-esearch and Develo"#ent Costs
!a#"le+Compute the amount to "e reported as research andde*elopment expense.
LO @ Describe the accounting for research and develo"#ent and si#ilar costs.LO @ Describe the accounting for research and develo"#ent and si#ilar costs.
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Chapter
12-41
;alance sheet
&ntani"le assets shown as a separate item.
Contra accounts normally not shown.
Inco#e state#ent
'eport amortiation expense and impairmentlosses in continuin operations.
Total ';7 costs chared to expense must "edisclosed.
Presentations of Intangibles and -Presentations of Intangibles and -??DDPresentations of Intangibles and -Presentations of Intangibles and -??DD
LO 14 Indicate the "resentation of intangible assets and related ite#s.LO 14 Indicate the "resentation of intangible assets and related ite#s.
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Chapter
12-42
Presentations of IntangiblesPresentations of IntangiblesPresentations of IntangiblesPresentations of Intangibles
LO 14 Indicate the "resentation of intangible assets and related ite#s.LO 14 Indicate the "resentation of intangible assets and related ite#s.
Illustratio 12-15
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Chapter
12-43
Presentations of -Presentations of -??D CostsD CostsPresentations of -Presentations of -??D CostsD Costs
LO 14 Indicate the "resentation of intangible assets and related ite#s.LO 14 Indicate the "resentation of intangible assets and related ite#s.
Illustratio 12-1!
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Chapter
12-44
Accounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are Costs
LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.
APPEN&I'APPEN&I' 12A12ADiversity in Practice
Companies can either
"urchase computer software or
create it.
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Chapter
12-45
Accounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are Costs
LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.
&he ProfessionBs Position
A(; A(C @8.%24%4.! Maor recommendations of thispronouncement are:
1. 9ntil a company has esta"lished technoloicalfeasi"ility for a software product+ it should chareto ';7 expense the costs incurred in creatin theproduct.
2. Technoloical feasi"ility is esta"lished when thecompany has completed a detailed proram desin ora workin model.
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Chapter
12-4!
Accounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are Costs
LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.
Accounting for Ca"itali$ed (oft/are Costs&f companies are to capitalie software costs+ then theymust esta"lish a proper amortiation pattern.
,s a "asis for amortiation+ one of two amounts is used:1. the ratio of current re*enues to current and anticipated
re*enues (the percent!of!re*enue approach)+ or
2. the straiht!line method o*er the remainin useful life of
the asset (straiht!line approach).
Must use whiche*er of those amounts is reater.
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Chapter
12-4#
Accounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are CostsAccounting for Co#"uter (oft/are Costs
LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.LO 11 nderstand the accounting treat#ent for co#"uter soft/are costs.
-e"orting (oft/are CostsCompanies should report the followin information relatinto software.
1. 9namortied software costs.2. The total amount chared to expense and the
amounts+ if any+ written down to net realia"le *alue.
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