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PRDV201: Accounting Principles I

Unit 7: Long-Term Intangible Asset Reporting   In Unit 6, you learned about tangible assets or items that have a “physical” presence.  Tangible assets, however, are not the only types of assets that it may hold rights to, or own.  Copyrights, trademarks, and patents are types of “intangible assets” that are highly valuable though they cannot be physically held or accessed.

In this unit, you will also learn about mergers, acquisitions, and goodwill – another type of intangible asset that is also recorded on financial statements.  For example, a company may pay more than the book value to acquire another company.  Imagine giving a waiter a 200% tip for the outstanding service he or she provided.  This is similar to the concept of goodwill that many companies follow when buying other companies.  You will learn more about goodwill, why companies extend this courtesy, and how this transaction is recorded in accordance with accounting principles.

As you work through this unit, be sure to focus on the difference between tangible and intangible assets.  Be particularly mindful of the different ways incremental losses are rectified and recorded on financial statements.

Unit 7 Time Advisory
This unit should take approximately 3 hours to complete.

☐    Subunit 7.1: 2.25 hours

☐    Subunit 7.2: 0.75 hours

Unit7 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Differentiate between intangible and tangible long-term assets. - Explain how and why cost capitalization is used for intangible assets. - Identify examples of identified intangible assets. - Describe definite-life and indefinite-life intangible assets and how they are recorded on financial statements. - Describe goodwill, and discuss its purpose.

7.1 What Are Intangible Assets?   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 11: Plant Asset Disposals, Natural Resources, and Intangible Assets” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 11: Plant Asset Disposals, Natural Resources, and Intangible Assets” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “Intangible Assets” on pages 492–497.  As you
read, take notes on what intangible assets are and how they differ
from general assets.  By the end of this reading, you should be able
to name several examples of intangible assets that a company may
own.  

 Reading this chapter and taking notes should take approximately 30
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

7.1.1 Identifiable Intangible Assets   7.1.1.1 Amortization   - Lecture: Khan Academy’s “Introduction to Amortization” Link: Khan Academy’s “Introduction to Amortization” (YouTube)

 Instructions: Please click on the link above and watch the video
lecture, which details the difference between depreciation and
amortization.  By the end of this lecture, you should be able to
calculate straight-line amortization and distinguish when
depreciation and amortization is used in business settings.  

 Watching this lecture and taking notes should take approximately 15
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

7.1.1.2 Definite-Life Intangibles and Indefinite-Life Intangibles   - Reading: Dr. Larry Walther’s Principles of Accounting: “Chapter 11: Advanced PP&E; Issues/Natural Resources/Intangibles” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles” (HTML)

 Instructions: Please click on the link above and read the
“Intangibles” section of this chapter.  As you read, take notes on
how the differences between definite life and indefinite life
intangible assets and how they are handled in terms of recording
amortization.  

 Reading this chapter and taking notes should take approximately 15
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 11: Advanced PP&E; Issues/Natural Resources/Intangibles: Amortization Practice Worksheet” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles: Amortization Practice Worksheet” (PDF)

    Instructions: Please click on the link above and carefully read the directions before completing the worksheet.  Calculate the straight-line amortization for the given entries, where appropriate.  If you have difficulty completing the worksheet, refer back to the lectures and readings assigned below subunit 7.1.

    Reviewing your previous readings and completing this worksheet should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 11: Advanced PP&E; Issues/Natural Resources/Intangibles: Intangible Asset Practice Worksheet” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 11: Advanced PP&E Issues/Natural Resources/Intangibles: Intangible Asset Practice Worksheet” (PDF)

    Instructions: Please click on the link above and carefully read the directions before completing the worksheet.  Calculate the straight-line amortization for the given entries, where appropriate.  If you have difficulty completing the worksheet, refer back to the lectures and readings assigned in subunit 7.1.

    Reviewing your previous readings and completing this worksheet should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

7.1.2 Goodwill & Goodwill Impairment   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 11: Plant Asset Disposals, Natural Resources, and Intangible Assets” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 11: Plant Asset Disposals, Natural Resources, and Intangible Assets” (PDF)

 Instructions: If you have not already saved this document to your
computer, please click on the link above to download the PDF.  Read
the section titled “Intangible Assets,” specifically the section
with topic heading “goodwill” on pages 497–499.  As you read, take
notes on what type of asset goodwill is and how it is defined and
calculated.  By the end of this reading, you should be able to
define goodwill and explain why a company would extend this when
purchasing another company.  

 Reading this chapter and taking notes should take approximately 10
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).
  • Lecture: YouTube: Money Week’s “What Is Goodwill?” Link: YouTube: Money Week’s “What Is Goodwill?” (YouTube)

    Instructions: Please click on the link above and watch the video lecture, which details the specifics of goodwill, how to calculate goodwill, and how goodwill impairment can be harmful for a company.  By the end of this lecture, you should be able to define goodwill impairment and describe how it is handled according to accounting rules.  Please note that the money references in the video are in United Kingdom denominations.  This should not change the understanding of the material.  Pay close attention to the mathematical calculations that are done as opposed to the currency that is used.

    Watching this lecture and taking notes should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

7.2 Intangible Assets on Financial Statements   - Reading: Financial Accounting: “Section 11.2: The Balance Sheet Reporting of Intangible Assets” Link: Financial Accounting: “Section 11.2: The Balance Sheet Reporting of Intangible Assets” (PDF)

 Instructions:  Please click on the link above and scroll down to
section 11.2. Intangible assets are not physical in nature and
include such items as copyrights, patents, trademarks, good will,
brand recognition, etc.  

 Reading this section and note taking should take you approximately
20 minutes to complete.  

 Terms of Use: The text was adapted by The Saylor Foundation under a
[Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work's original creator or licensee.