Q1. Define the term ‘Intangible Assets’.

Show the accounting treatment of the following

intangible assets.

An intangible asset is an asset that is not physical in nature. Goodwill, brand

recognition and intellectual property, such as patents, trademarks and copyrights, are all
intangible assets. Intangible assets exist in opposition to tangible assets, which include
land, vehicles, equipment and inventory. Additionally, financial assets such as stocks
and bonds, which derive their value from contractual claims, are considered tangible
assets.
a) Patents
A patent is considered an intangible asset; this is because a patent does not have
physical substance, and provides long-term value to the owning entity. As such, the
accounting for a patent is the same as for any other intangible fixed asset, which is:

 Initial recordation. Record the cost to acquire the patent as the initial asset cost. If a
company files for a patent application, this cost will include the registration,
documentation, and other legal fees associated with the application. If the company
instead bought a patent from another party, the purchase price is the initial asset
cost.
 Amortization. The owner of the patent gradually charges the cost of the patent to
expense over the useful life of the patent, usually using the straight-line
amortization method.
 Impairment. If a patent no longer provides value, or a reduced level of value,
recognize an impairment to reduce or eliminate the carrying amount of the asset.
 Recognition. Once the company is no longer making use of the patented idea, the
asset can be derecognized by crediting the balance in the patent asset account and
debiting the balance in the accumulated amortization account. If the asset has not
been fully amortized at the time of recognition, then any remaining unamortized
balance must be recorded as a loss.

b) Copy Rights
Copyright refers to the legal right of the owner of intellectual property. In simpler terms,
copyright is the right to copy. This means that the original creator of a product and
anyone he gives authorization to are the only ones with the exclusive right to reproduce
the work. Copyright law gives creators of original material, the exclusive right to further
develop them for a given amount of time, at which point the copyrighted item becomes
public domain.

c) Trade Marks/Trade Names

The trademark is an intangible asset that can be capitalized on your balance sheet.
Capitalizing a trademark happens through the purchase of an existing trademark or
 through the registration of a new trademark. An existing trademark acts as an asset with
perceived value. Registering a new trademark is only valued at the registration costs
themselves.

d) Franchises & Licenses

In franchise accounting, the franchisee owns an individual franchise location. They
operate the franchise under the guidelines the franchisor sets. Buying a franchise can
help you grow your business faster because of the recognizable brand. But, you don’t
get to make decisions about the business.

e)Goodwill

Determine the fair value of the company's assets. As mentioned earlier, the book
value of a business does not always equal the market value (the fair value, or, the
estimated value that someone in the market would pay for the business). The first step
is to take the book value of the business (or the assets minus the liabilities), and figure
out what the market value of those net assets are.[4]
 For example, the book value of the business being purchased may be $1 million.
However, due to recent strong market conditions, the market value may be slightly
higher, at $1.5 million. This means people would pay $1.5 million for those $1 million in
assets.
 Calculating market value is usually fairly complex and requires plenty of background
knowledge, and as a result, the fair value of a business is usually calculated by a
certified professional, such an accountant, financial analyst, or appraiser.
 Typically, figuring out market value will involve looking at what other similar assets or
businesses are selling for. One approach is to average the value of similar businesses
being sold, and then price the value of the business being purchased above or below
the average depending on the quality of the business.
 The term "market value" is interchangeable with "fair value" for the purpose of this
article.
Add together the values of all acquired assets. Once the fair value of assets has
been determined, you can add them together. For example, assume the business being
purchased has $200,000 in property, plant, and equipment, $500,000 in cash, and
$800,000 in inventory.
 The fair value of the business's assets would therefore be $1.5 million.
Subtract the business's liabilities from the assets. If the business has liabilities of
$500,000, subtracting this from the business's assets of $1.5 million means the fair
value of the company's assets is $1 million.
 This simply means that if you subtract the business's assets from their liabilities to get a
book value, and you determine what the market would pay in theory for those assets,
the result in this case would be $1 million.
 Subtract the book value from the purchase price to calculate Goodwill. Goodwill is
defined as the price paid in excess of the firm's fair value. To calculate it, simply
subtract the total asset market value amount from the purchase price; this amount is
nearly always a positive number.
 For example, consider a firm that acquires another firm for $1,000,000. If the book value
of the acquired firm totals $800,000, then the amount of goodwill realized is (1,000,000 -
800,000) or $200,000.
Record the journal entry to recognize the acquisition. Once the amount of Goodwill
is determined, open whatever accounting software you use to enter the appropriate
general entries.
Test the goodwill account for impairment each year. Each year, Goodwill needs to
be tested for something known as impairment. Impairment occurs when something bad
happens to a business, which causes the market value of it's assets to decline below
the book value. When this happens, Goodwill needs to be reduced by the amount the
market value falls below the book value.
Record the journal entry to recognize any goodwill impairment. If the goodwill
account needs to be impaired, an entry is needed in the general journal. To record the
entry, credit Loss on Impairment for the impairment amount and debit Goodwill for the
same amount. This accounts for a reduction in Goodwill by using Loss on Impairment
as a contra-asset account.

Q2. At 1 October 2002 Jim had fixed assets as follows:

Land Buildings Machinery

Cost $85,000 $120,000 $74,800
Accumulated depreciation nil 28,920 35,600

Jim’s policy is to provide for a full year’s depreciation in the year of acquisition, but no
provision is made in the year of disposal. Depreciation is provided at the following rates:

Land nil
Buildings written off over 25 year, on the straight line basis (SLM)
Machinery 20% per annum, on the reducing balance basis

During the year to 30 September 2003, Jim added extension to the buildings at a cost of $6,80.
He also acquired a new machine, by paying the dealer $9,000 by cheque and trading in an old
machine for $5,500.

The machine traded in had been acquired in January 2000 at a cost of $11,000.
 Jim has asked why depreciation is not charged on the land, but is charged on other fixed assets.

Required:

A) Calculate the profit or loss on the machine which was traded in.

Year Book value Rate Dep expense Acc dep Book value RW

200 11000 0.2 2200 2200 2200 11000*20%=2200

2001 2200 0.2 440 1760 1760 8800*20%=1760

2002 1760 0.2 352 1408 1408 2/100=0.2

5368

Cost of machine 11000

Less: acc dep (5368)
Book value 5632
Trade in (5500)
Loss on disposal 132
B) As at 30 September 2003, calculate:

(i) The value of Jim’s non-current assets, before deducting depreciation;

Land building

85000 c/f 85000 12500

85000 85000 6800 c/f 127300

b/f 85000 127300 127300

b/f 127300

Machine

74800 11000

14500 c/f 78300

89300 89300

b/f 78300
 Value of non-current assets:
Land: 58000
Building: 127300
Machine 89300
290600

(ii) The accumulated depreciation;

Land =0
Building= 127300/25=5092
Machine=35600-5368=30232

(iii) The net book value of non-current assets.

= 209600-73858
=216742

Q3 You are employed in the accounting department of a transport company. One of your tasks is
to maintain the accounting records relating to non-current assets.

During the year to 30 November 2007, a new Lorry was purchased. The invoice includes the
following information:

Date of invoice ----------- 1 January 2007

Volvo model S557 $24,000

Customisation with company logo 1,000
Insurance for year to 31 December 2007 5,000
Fuel Supplied 400
Total cost $30,400

At 30 November 2006, the total cost of the company’s lorries was $242,000, and the
accumulated depreciation was $166,736. During the year to 30 November 2007 a lorry which
cost $22,000 and which had a net book value of $11,264 was sold.

Your company’s policy is to depreciate lorries on the reducing balance basis at a rate of 20% per
annum. It is anticipated that lorries will be sold after three years of use. The expected sale
 proceeds are 50% of the cost capitalized on acquisition. A full year’s depreciation is charged in
the year of acquisition, and no depreciation in the year of disposal.
Required:

(a) Calculate the cost of new lorry to be capitalized on acquisition as non-current asset.
Cost of new lorry= 52000

(b) Assuming that the new lorry is sold on 31 December 2009, calculate the anticipated loss or
profit on disposal.

Year Book value Rate Dep expense Acc dep Book value

2007 25000 0.2 5000 5000 5000

2008 5000 0.2 1000 4000 4000

2009 4000 0.2 8000 3200 3200

Total acc dep= 12200

Cost of new lorry 25000

Less acc dep (12200)
Book value 12800
Less proceeds (12500)
Loss on disposal 300

(c) prepare the following ledger accounts for the year to 30 November 2007:
i. Lorries at cost;
ii. Accumulated depreciation on lorries

Q4 On January 1, 2012, the ledger of Tyrus Company contains the following liability accounts.
 Accounts Payable $30,000
Sales Taxes Payable 5,000
Unearned Service Revenue 12,000

During January, the following selected transactions occurred.

Jan. 1 Borrowed $20,000 in cash from Platteville Bank on a 4-month, 6%, $20,000 note.
5 Sold merchandise for cash totaling $9,752, which includes 6% sales taxes.
12 Provided services for customers who had made advance payments of $8,000.
14 Paid state treasurer’s department for sales taxes collected in December 2011, $5,000.
20 Sold 900 units of a new product on credit at $44 per unit, plus 6% sales tax. This new
product is subject to a 1-year warranty.
25 Sold merchandise for cash totaling $16,536, which includes 6% sales taxes.
Instructions

(a) Journalize the January transactions.

Date particular debit credit

Jan 1 Cash 20000

Notes payable 20000

5 Cash 9752

Sales revenue 9200

Sales and tax payable 552

12 Cash 8000

Revenue received 8000

14’ Sales tax payable 5000

Cash 5000

20 A/receivable 39600

Sales receivable 37358

Sales tax payable 2241

25 Cash 16536

Sales receivable 15600

Sales tax payable 936

 (b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2)
Estimated warranty liability, assuming warranty costs are expected to equal 5% of sales of the
new product.

1 Interest expense 40

Interest payable 40

2 Warranty expense 2241

Warranty payable 2241

(c) Prepare the current liabilities section of the balance sheet at January 31, 2012. Assume no
Change in accounts payable
Tyrus company
Balancesheet
31 jan 2012
A/payable 30000

Notespayable20000

interest payable 40

warranty payable 2241

sales tax payable3177