In: Accounting
BBF Inc. owns a broadcast licence it purchased for $96,250, which is renewable every 10 years if BBF complies with regulatory requirements and provides an acceptable level of service to its customers. The licence may be renewed indefinitely at little cost and was renewed twice prior to BBF purchasing it. BBF intends to renew the licence indefinitely, and evidence supports its ability to do so. Historically, there has been no compelling challenge to the renewal of the licence. It is not expected that the technology used in broadcasting will be replaced by another technology any time in the foreseeable future. Therefore, the cash flows from that licence are expected to continue indefinitely. Since the date of purchase two years ago, BBF has not recorded any amortization on the basis that the intangible asset has an indefinite useful life. On January 2, 2020, the regulator advised BBF that it will no longer renew broadcast licences but will auction them off. At that date, the broadcast licence has two and one-half years until it expires. The cash flows from the licence are expected to continue until the licence expires. |
Does this change require a
change in accounting policy? |
What journal entry, if any,
should BBF Inc. record for the fiscal year ending December 31,
2020? (Credit account titles are automatically indented
when the amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for
the amounts.)
|
An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
In this case, Broadcast Licence purchased by BBF Inc. is an Intangible Asset.
The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. Amortisation should commence when the asset is available for use.
In this case, only two and a half years are left for the expiry of the Licence. No amortisation was done in any of the Previous years On January 2, 2020, the regulator advised BBF that it will no longer renew broadcast licences but will auction them off. Now, Amortization will be done in two and a half year. The journal entry required at the close of year (December 31, 2020) is
Particulars Amount Amount
Broadcast Licence Fee Amortization Expense A/c Dr. $38,500
To Broadcast Licence Fee Asset A/c $38,500
(Being Licence fee amortised)
Calculation of Broadcasting Licence Fee
= Licence Fee Amount * 1/2.5 years
= 96,250 * 1/2.5
= $38,500
Also, there will be no change in accounting policy, since, there will be no renewal of Licence at the expiry of licence and it will be auctioned. So amortization will be done on the basis of Life remaining. Earlier it was not amortized because of having indefine useful life.