Computer software and website development technology purchased

Oct 13, 2025 by talynt.org 35 views

E8-20 (Algo) Computing and Reporting the Acquisition and Amortization of Three Different Intangible Assets

LO8-6 Trotman Company had three intangible assets at the end of the current year:

Computer software and website development technology purchased for $120,000 on January 1, 2022, with an estimated useful life of 5 years.
Patent rights acquired on January 1, 2022, for $80,000, with an estimated useful life of 10 years.
Franchise rights acquired on January 1, 2022, for $60,000, with an estimated useful life of 7 years.

Trotman Company's accounting policy is to amortize intangible assets using the straight-line method.

Amortization of Intangible Assets

To compute the amortization expense for each intangible asset, we need to calculate the annual amortization period.

Computer software and website development technology: The annual amortization period is 5 years, and the cost is $120,000. Therefore, the annual amortization expense is $120,000 / 5 = $24,000.
Patent rights: The annual amortization period is 10 years, and the cost is $80,000. Therefore, the annual amortization expense is $80,000 / 10 = $8,000.
Franchise rights: The annual amortization period is 7 years, and the cost is $60,000. Therefore, the annual amortization expense is $60,000 / 7 = $8,571.

Amortization Expense for the Current Year

To compute the total amortization expense for the current year, we need to add up the annual amortization expenses for each intangible asset.

Computer software and website development technology: $24,000
Patent rights: $8,000
Franchise rights: $8,571

The total amortization expense for the current year is $24,000 + $8,000 + $8,571 = $40,571.

Amortization Expense for Future Years

To compute the amortization expense for future years, we need to continue to amortize each intangible asset over its useful life.

Computer software and website development technology: The annual amortization expense will be $24,000 for the next 4 years, and $0 for the year after that.
Patent rights: The annual amortization expense will be $8,000 for the next 9 years, and $0 for the year after that.
Franchise rights: The annual amortization expense will be $8,571 for the next 6 years, and $0 for the year after that.

Amortization Schedule

Here is the amortization schedule for each intangible asset:

Year	Computer Software and Website Development Technology	Patent Rights	Franchise Rights
2022	$24,000	$8,000	$8,571
2023	$24,000	$8,000	$8,571
2024	$24,000	$8,000	$8,571
2025	$24,000	$8,000	$8,571
2026	$0	$8,000	$8,571
2027	$0	$8,000	$8,571
2028	$0	$8,000	$8,571
2029	$0	$8,000	$8,571
2030	$0	$8,000	$0
2031	$0	$0	$0

Conclusion

In conclusion, Trotman Company has three intangible assets: computer software and website development technology, patent rights, and franchise rights. The company uses the straight-line method to amortize these intangible assets. The annual amortization expense for each intangible asset is $24,000 for computer software and website development technology, $8,000 for patent rights, and $8,571 for franchise rights. The total amortization expense for the current year is $40,571. The amortization schedule for each intangible asset is provided above.

LO8-6 Key Takeaways:

Intangible assets are assets that do not have a physical form, such as patents, copyrights, and trademarks.
Intangible assets are amortized over their useful life using the straight-line method.
The annual amortization expense for each intangible asset is calculated by dividing the cost of the asset by its useful life.
The total amortization expense for the current year is the sum of the annual amortization expenses for each intangible asset.
The amortization schedule for each intangible asset shows the annual amortization expense for each year of the asset's useful life.
E8-20 (Algo) Computing and Reporting the Acquisition and Amortization of Three Different Intangible Assets LO8-6 Q&A

Q: What are intangible assets?

A: Intangible assets are assets that do not have a physical form, such as patents, copyrights, trademarks, and franchise rights.

Q: Why are intangible assets important?

A: Intangible assets are important because they can provide a competitive advantage to a business and can be a source of revenue.

Q: How are intangible assets acquired?

A: Intangible assets can be acquired through purchase, licensing, or development.

Q: What is the straight-line method of amortization?

A: The straight-line method of amortization is a method of amortizing intangible assets over their useful life. It involves dividing the cost of the asset by its useful life and amortizing the asset evenly over that period.

Q: How is the annual amortization expense calculated?

A: The annual amortization expense is calculated by dividing the cost of the asset by its useful life.

Q: What is the total amortization expense for the current year?

A: The total amortization expense for the current year is the sum of the annual amortization expenses for each intangible asset.

Q: What is the amortization schedule?

A: The amortization schedule is a table that shows the annual amortization expense for each year of the asset's useful life.

Q: Why is it important to keep track of amortization expenses?

A: It is important to keep track of amortization expenses because it helps to accurately reflect the cost of intangible assets on the balance sheet and to accurately report the expense on the income statement.

Q: Can intangible assets be amortized using other methods?

A: Yes, intangible assets can be amortized using other methods, such as the units-of-production method or the accelerated method.

Q: What are some common intangible assets?

A: Some common intangible assets include patents, copyrights, trademarks, franchise rights, and software development costs.

Q: How do intangible assets affect a company's financial statements?

A: Intangible assets can affect a company's financial statements by increasing the value of the company's assets and by increasing the company's expenses.

Q: Why is it important to properly account for intangible assets?

A: It is important to properly account for intangible assets because it helps to accurately reflect the company's financial position and to accurately report the company's performance.

Q: Can intangible assets be impaired?

A: Yes, intangible assets can be impaired if their carrying value exceeds their recoverable amount.

Q: What is the recoverable amount of an intangible asset?

A: The recoverable amount of an intangible asset is the amount that can be recovered from the asset through its use or sale.

Q: How is the recoverable amount of an intangible asset determined?

A: The recoverable amount of an intangible asset is determined by estimating the future cash flows that the asset is expected to generate.

Q: What is the impairment loss on an intangible asset?

A: The impairment loss on an intangible asset is the difference between the carrying value of the asset and its recoverable amount.

Q: How is the impairment loss on an intangible asset recorded?

A: The impairment loss on an intangible asset is recorded as a reduction in the carrying value of the asset and as an expense on the income statement.

Q: Can intangible assets be disposed of?

A: Yes, intangible assets can be disposed of through sale, abandonment, or impairment.

Q: How is the gain or loss on the disposal of an intangible asset recorded?

A: The gain or loss on the disposal of an intangible asset is recorded as a gain or loss on the income statement.

Q: What are some common mistakes to avoid when accounting for intangible assets?

A: Some common mistakes to avoid when accounting for intangible assets include failing to properly identify and classify intangible assets, failing to properly amortize intangible assets, and failing to properly record impairment losses.

Q: How can intangible assets be used to create value for a company?

A: Intangible assets can be used to create value for a company by providing a competitive advantage, generating revenue, and increasing the company's market value.

Q: What are some best practices for accounting for intangible assets?

A: Some best practices for accounting for intangible assets include properly identifying and classifying intangible assets, properly amortizing intangible assets, and properly recording impairment losses.

Q: How can companies ensure that they are properly accounting for intangible assets?

A: Companies can ensure that they are properly accounting for intangible assets by following accounting standards, maintaining accurate records, and seeking professional advice.