Question

Lake Company, organized in 2017, has the following transactions related to intangible assets. Lake Company uses the calendar year for financial reporting.

1/1/17	Purchased patent (8-year life)	$560,000
4/1/17	Goodwill purchased (indefinite life)	360,000
7/1/17	Purchased copyright on artwork; expiration date 7/1/2037	440,000
9/1/17	Research and development costs	185,000

Enter your answers below in whole dollars without a $ sign (e.g., xxx).

1. How much expense will Lake Company recognize in 2017 due to the purchased patent?
2. How much expense will Lake Company recognize in 2017 due to the purchased Goodwill?
3. How much expense will Lake Company recognize in 2017 due to the purchased copyright?
4. How much expense will Lake Company recognize in 2017 due to the Research and development?
5. Based on the above, what is the net book value of total intangible assets that Lake Company’s balance sheet will show on Dec. 31, 2017?

Answer 1

As per IAS 38 An intangible asset is identifiable when it:

• is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or
• arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Further, IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost) if, and only if:

• it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
• the cost of the asset can be measured reliably.

As per IAS -38 research and development costs shall be charged to expense.

Further, Intangible assets are initially measured at cost. Only those intangible asset which are purchased shall be recorded in the books

As per Para 97 of IAS 38 Measurement subsequent to acquisition: intangible assets with finite lives

The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life.The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset.

Keeping in view above provision answer to the questions are as follows:-

1. How much expense will Lake Company recognize in 2017 due to the purchased patent?

Answer: Cost of Patent will be recorded in Balance Sheet and nothing will be expensed in Profit and Loss A/c.Only Cost related to amortisation or impairment of Goodwill will be recorded as expense in Profit and Loss A/c.

Amortisation of Patent= 560000/8 years= 70000/year.

Hence 70000 will be recorded in Profit and loss A/c.

2. How much expense will Lake Company recognize in 2017 due to the purchased Goodwill?

Answer: Cost of Purchased goodwill will be recorded in balance sheet at initial measurement and nothing will be expensed in Profit and Loss A/c. Only Cost related to amortisation or impairment of Goodwill will be recorded as expense in Profit and Loss A/c.In case of asset having infinite life , the intangible asset is tested for impairment at the end of each year and the amount of impairment is recorded as expense in profit and loss account.

3. How much expense will Lake Company recognize in 2017 due to the purchased copyright?

Answer: Cost of Copyright will be recorded in Balance Sheet and nothing will be expensed in Profit and Loss A/c.Only Cost related to amortization or impairment of Goodwill will be recorded as expense in Profit and Loss A/c.

Amortisation of Copyright= 440000/20 years= 22000/year.

Hence 22000 will be recorded in Profit and loss A/c.

4.How much expense will Lake Company recognize in 2017 due to the Research and development?

Answer: Research and development cost is expensed in Profit and loss A/c unless technical and commercial feasibility of the asset for sale or use have been established.

So, total amount of 185000 shall be charged to profit and loss a/c.

5.What is the net book value of total intangible assets that Lake Company’s balance sheet will show on Dec. 31, 2017?

Net Book Value of Intangible Asset
	Particulars	Amount
	Patent	560000
	Less: Amortisation	-70000
	Goodwill	360000
	Purchased Copyright	440000
	Less: Amortisation	-22000
	Total	1268000