Intangible Assets (2)
December 9, 2008 – 6:17 amThe legal life of a patent is seventeen years from the date the patent was issued. The legal life of a copyright is seventy years from the year the author dies. The legal life of a franchise is determined by the franchise agreement. It is common practice to record the amortization in the asset account, instead of using a separate Accumulated amortization account. My preference is to use a separate Accumulated amortization account when a company has multiple intangible assets in the same account (for example, when there are three patents included in the Patents account). This makes it easier to know how much was paid for each asset and to associate the amortization taken should an item be sold. If the items are always held until they are fully amortized, then it really doesn’t matter. An example will illustrate the entries. Let’s say it costs $17,000 to get a patent filed and granted. The patent is granted January 1. We believe that its useful life is twenty-five years. The annual amortization is calculated by taking the cost ($17,000) and dividing it by the lesser of the useful life (twentyfive years), the legal life (seventeen years), or forty years. The lesser of the three lives is seventeen years. Therefore, the cost ($17,000) divided by the amortization life (17) equals the annual amortization ($1,000). Posting the entries to the general ledger account would result in an account balance of $16,000, as shown in Figure 12-1. Taken From : Accounting Demystified If the asset and the amortization are kept in separate accounts, then the posting of the entries results in the situation shown in Figure 12-2.
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