Question

2. Johnson Health is a drug company which manufactures and sells prescription and over the counter medications. The following accounting issues need to be addressed.

a. Johnson has a patent on a drug, Myoplat, which has a remaining legal life of 10 years? What is the appropriate amortization period for the patent?

b. Can Johnson present its intangible assets under property, plant and equipment on its balance sheet?

c. How does Johnson report amortization expense on its income statement?

Answer 1

a) The amortization is charged over the useful life or legal life of the patent, whichever is lower. Useful life means the period which benefits are received. The legal life of the patent, Myoplat is 10 years, and if the company receives benefits over these years, then the amortization period is 10 years. The amortization can be charged evenly for 10 years, like straight line method of depreciation. But, the patent is expected to be profitable for only 5 years, and then the amortization should be charged for 5 years only.

b) Property, Plant and equipment are the non-current, long term and important tangible assets of an organization. The intangible assets are those which do not have physical existence and cannot be recorded under tangible assets like PP&E. It should be recorded under separate heading in balance sheet.

c) Amortization expense is the write off of intangible asset over the useful life. The amount of write off recorded in the income statement within the line item amortization and depreciation.